(i) Public-Credit Pooling

None of the colonial socialist infrastructure and its support for public employment could have been achieved without the use of colonial treasuries as intermediaries for foreign investors hunting for yield in the Australian colonies. So much was obvious to contemporaneous observers^{Footnote 47}:

Economic historians have since agreed that offshore debt capital imported via colonial treasuries drove the colonies’ outsized public capital formation. Maddock explains that the [t]he London market...became the natural source of capital for Australian government borrowers’.^{Footnote 48} Colonial governments sometimes borrowed directly from the Bank of England (then still a dividend-paying private bank) but also floated their debt on the wholly private markets.^{Footnote 49} By the end of the 19^th century, investment in Australia ‘absorbed a high proportion, of the order of a third to a half, of total net British lending overseas’.^{Footnote 50} By 1890, the colonial governments were acting in concert as a debtors’ union, all using the same investment bank ‘Nivison & Co.’ which, by 1890, ‘came to act as agent for all Australian governments, eliminating contention and the need for external underwriting’.^{Footnote 51} This ‘superior ability of the [colonial] government[s] to raise capital, particularly in London… prompted the original transfer’ of major infrastructure to public ownership in the latter-19^th century.^{Footnote 52}

Borrowing on the London capital market vastly overshadowed local debt issues Figure 2^{Footnote 53}:

Figure 2.

Nominal values of colonial government debentures sold in Australia and London, 1849-76(£m).

London investors were hungry for colonial yields for two (related) reasons: high rewards and low risks. Rewards were high because railways, ports and lighthouses were highly profitable, irrespective of public ownership.^{Footnote 54} More importantly, North Atlantic investors saw the Australian colonies as low risk^{Footnote 55}: risk premia between 1870 and 1913 averaged 0.56 per cent on Australian colonial debt compared to 0.83 per cent in South Africa, 1.73 per cent in Argentina and 1.94 per cent in Japan.^{Footnote 56} Structural features of colonial governments significantly reduced their credit-risk. Public treasury scoping of infrastructure projects provided ‘[l]ong-term planning of government capital formation’ and parliamentary processes of supply and appropriation provided ‘long-term authorisation of expenditures’.^{Footnote 57} ‘Governments themselves invested’ in public accounts and audit institutions which supplied investors with ‘systematic information gathering and publication’ of government-run assets.^{Footnote 58} British Governors oversaw public works with a ‘watchful eye’.^{Footnote 59} Each of these structural feature neutralised the (otherwise hefty) default risk premium, given that ‘[b]y 1890 the Australian colonists had accumulated more public debt per capita than residents of any other country or colony in the world’.^{Footnote 60}

In terms of constitutional structure, there were two major elements of investor protection that off-set the crushingly large debt burden. The first was risk pooling through statutory borrowing: ‘bundling claims against a broad range of assets’ leading to ‘economies of scale and scope’^{Footnote 61} which thrilled London’s investor community.^{Footnote 62} One type of credit pooling was directly imported from the UK. The colonial constitutions of the 1850s followed the British precedent of consolidating fiscal revenues as security for loans of private financiers.^{Footnote 63} Under that system, colonial customs and excise receipts flowed into ‘consolidated funds’ which were collateral pools for offshore debtholders^{Footnote 64}: thus the local reliance on indirect taxes (customs/excise) supported inward debt-capital investment.

Another type of colonial credit pooling was novel and focused explicitly on pooling capital assets, rather than fiscal receipts. Colonial parliaments enacted separate Loan Acts to raise project-finance for capital works which linked specific bond-lines to specific public assets. A representative example is the Public Works Loan Act 1881 (NSW) 45 Vict, c 22 which authorised ‘the Government to borrow’ £1million ‘for the following several purposes’^{Footnote 65}:

The statute tailored the securities tendered to offshore investors, providing for the sale of ‘debentures…in the form of funded stock in…London’ and transfer of the debentures to be recorded ‘in accordance with regulations made or approved by the Committee of the [London] Stock Exchange or adopted by the Bank of England’.^{Footnote 66} Funds received from bond sales were ‘to be placed to a separate credit to be called ‘The General Loan Account’ and withdrawals could only occur with permission of the Governor (appointed by and responsible to, London).^{Footnote 67}

The second element of foreign-investor protection was a highly innovative system of public liability rules which largely neutralised sovereign risk for foreign investors in colonial public capital. At common law,^{Footnote 68} the Crown was immune from suit subject to a discretionary action (‘the petition of right’) which guaranteed a disappointed counter-party no financial redress.^{Footnote 69} Applying this system to the ‘Crown’ which had dispossessed the landmass of Australia presented an obvious block to foreign investment: lending the colonial Crown funds for project-finance risked giving money to an entity which could neither be sued for failing to construct and operate the public asset or sued for default of the debt.^{Footnote 70}

The solution to that problem of investor-risk in the colonial socialist project was to create a public-liability system that ensured colonial governments would be liable for non-performance of commercial obligations though the ordinary judicial process, supervised by British authorities. From the 1860s, ‘claims against the government’ legislation was enacted which applied standard property law concepts to colonial governments.^{Footnote 71} South Australia and NSW passed the first of such legislation in the 1850s,^{Footnote 72} which empowered the Governor to approve actions against the ‘Colonial Government’^{Footnote 73}: sidestepping unresolved questions of the ‘Crown’s’ legal personality and amenability to suit.^{Footnote 74} Both South Australian and New South Wales Claims Against the Government Acts also ensured that judgment debts against colonial government could be easily paid,^{Footnote 75} another unclear matter under British law.^{Footnote 76} Additionally, colonial governments could reassure investors that ‘claims against them could be pursued through to the Privy Council’^{Footnote 77}: reserving ultimate decisions on sovereign-risk for political and legal authorities in London.^{Footnote 78}

(ii) Public-Social Insurance

The public capital dominance and public-credit pooling of the colonial socialist period were not driven by utopian social policy, but capital efficiency. Social insurance, in the form of universal old-age pensions, represented a divergence from that model. Even the sceptical and doctrinaire Métin described the first Australian old-age pension as ‘really tending towards socialism’.^{Footnote 79} Alongside private pension arrangements,^{Footnote 80} the UK government had paid pensions for centuries to holders of aristocratic/venal offices,^{Footnote 81} while the US government had expanded pension coverage to soldiers and their families. Latter-19^th century proposals within the British Empire for old-age pensions were largely based on contributory-models were which really forms of government mandated ‘thrift’, requiring minimum working years and ‘good character’ standards before ‘deserving poor’ could access retirement benefits, often mostly below subsistence levels.^{Footnote 82} The first step away from that parsimonious attitude to life-cycle dependence insurance was taken in New Zealand via Old-age Pensions Act 1898 (NZ) which created a scheme for universal non-contributory old-age pensions.^{Footnote 83} That relatively generous scheme formed the basis of Australian development of universal invalid and old-age pensions.^{Footnote 84}

By 1900, two types of pensions could be drawn in Australia, both associated with colonial socialist conditions: pensions related to public sector employment and universal old-age pensions. Public sector employment itself provided a type of pension, simply on account of the wages and retirement benefits payable to the bulk of public sector works. Such programs are notable in size from the 1890s. An example appears in the Victorian Railways Commissioners Act 1883 (Vic) which required that ‘every officer and employee holding office in the Railway Department at the time of the passing of this Act shall be entitled to compensation or retiring allowance’.^{Footnote 85} Public employment also served as a proxy for unemployment insurance^{Footnote 86}:

In addition to manipulating the government’s labour-wage bargain, a universal, non-contributory, old-age pension was proposed in NSW on explicitly humanitarian grounds. The parliamentary report which recommended the legislation stated the basic position: ‘pension should be granted as a right, not as charity, and it should not be seen as in any way humiliating to those who receive it’.^{Footnote 87} It rejected British contributory models (which penalised the poor and women) and drew on Continental European practice for inspiration.^{Footnote 88} Writing in 1902, Reeves describes the broad acceptance of those principles in the parliamentary debate on Australia’s first universal pension legislation. In the Lower House, ‘[r]ightly or wrongly, national thrift was not a word to conjure with in Sydney…Of direct opposition there was almost none. The Upper House, if not enthusiastic, was benevolent. Seldom, indeed, has a striking, novel, and expensive social reform been adopted with so little hesitation and amid so harmonious a chorus of blessings and good wishes’.^{Footnote 89} Funding for the scheme was recommended via mining royalties and profits from agricultural use of Crown Lands ‘with the State, instead of private individuals, as a progressive landlord’.^{Footnote 90}

The NSW pension was vastly expensive and generous relative to its period. It contained racist exclusions (‘asiatics’ and ‘indigenous natives’) but otherwise male and female residents of NSW for 25 years were eligible by default once they turned 65.^{Footnote 91} Early-life criminal offences were not disqualifications, nor was persistent unemployment.^{Footnote 92} The base quantum of £26 would have covered average annual spending on food, beverages, dwelling, fuel/light, entertainment and medical attendance.^{Footnote 93} People receiving private pensions were ineligible for pension and the base quantum was reduced by other income sources, as well as large property holdings.^{Footnote 94} Payments under the Act were protected from the vicissitudes of the political process by standing appropriation.^{Footnote 95} Victoria quickly followed with its own Claims for Old-Age Pensions Act 1900 (Vic), which largely mimicked the NSW legislation.^{Footnote 96} The absence of institutional resistance to those universal pension programs was striking, given that attempts to implement far less generous programs in the UK caused the constitutional crises which fundamentally remodelled the UK Parliament through the Parliament Act 1911,^{Footnote 97} as is discussed below in Part III.

(iii) Egalitarian State Potency

The Australian model of the constitutional state which emerges from the colonial socialist period is distinct in the Anglophone world. Executive governments were large business-operating entities which used their size and scale to acquire bulk-financing on international debt-capital markets, while providing vast public employment and generous social insurance. Legislatures innovated to support the potent executive with novel forms of public office, smoothed disputes in the public labour markets with conciliative industrial institutions and backstopped investor confidence by enacting innovative public liability regimes. Judiciaries applied the traditional common law, but accepted parliamentary innovations, and were the outpost of an Imperial system of investor protection which ensured executives’ access to cheap foreign credit despite large deficits.

Those features of the colonial constitutional state supported a political economy that rotated around a dominant public sector with strong compassionate tendencies: compared to the UK and US, they were markedly more ‘egalitarian’.^{Footnote 98} Importantly, however, colonial socialism was not driven by class struggle or ideas of common humanity. Indeed, European socialists commented that ‘Australasia has contributed little to social philosophy but she has gone further than any other land whatever along the road of social experiment’.^{Footnote 99}

The world of political ideas remained stapled to British concepts and theories, despite their infelicity.^{Footnote 101} This accounts for invocations of concepts like ‘liberalism’ during the Conventional Debates to describe social insurance projects which grated against contemporaneous understanding of constitutional liberalism.^{Footnote 102} Emerton quotes a neat illustration of that phenomenon in Barton’s interjections at the Melbourne Convention in 1898: ‘the want of foundation of accusations against this [draft Constitution] Bill on account of its alleged illiberal character’ is evidenced by such ‘very important further powers’ as ‘the power to legislate with reference to invalid and old-age pensions … [and] for the appointment of courts of conciliation and arbitration in industrial disputes which extend beyond the limits of one state’.^{Footnote 103} As explained in Part III below, universal old-age pensions and a state-governed wage system were both antithetical to orthodox constitutional accounts of liberalism, particularly in Britain and the US, in 1900.

Differences of opinion with European socialists were not simply rhetorical. Colonial Australians did not appear to seek radical re-distribution, but aimed for material comfort and had an investor mentality. Compared with working classes in Europe, ‘…the Australia worker…is a free spender. He does not agonize over the cost of an article or a pleasure he wants: he does not grudge any treats to his family, and so what is left over from his living expenses over goes on pleasure or on luxury goods’.^{Footnote 104} Additionally, surplus earnings were not solely devoted to consumption but were invested: ‘There is no evidence to support [the belief that protective legislation tends to make the worker improvident]: on the contrary savings bank deposits and payments to mutual benefit societies continue to increase every year’.^{Footnote 105} Thus, the potent egalitarian colonial state model produced citizens who aimed for the acquisition of property rights and the institutional foundations, particularly strong judiciaries, for their security. Nor did the colonial phase see an eradication of private entrepreneurship: to the contrary, private capital formation was enabled and boosted by the vast subsidies provided by publicly funded and owned ‘business enterprises’ which ‘[i]n terms of capitalisation and labour force…towered over private enterprise’.^{Footnote 106}

Finally, perhaps most significantly, the colonial socialist model was not premised on ideas of human solidarity and equality. Commitment to the British Empire, its military model and its racist policies was widespread. Métin recorded an example of the contradictions this created^{Footnote 107}:

Métin was confused by that fusion of institutional traditionalism and innovation, noting that ‘…the worker…would not like parliament to be elected on a property qualification as in Great Britain, but he manifests utterly unequivocal attachment to the monarchy and the most profound reverence for the sovereign and the royal family’.^{Footnote 108} Those anecdata need to be qualified by recent historical scholarship explaining the distinctiveness of pre-Federation Australian politics and constitutionalism.^{Footnote 109} Partlett has explained how ‘the federation movement was heavily influenced by radical Chartist ideas of a constitution that limited parliamentary power on certain fundamental principles’.^{Footnote 110} Those ideas led to radically different conceptions of egalitarian democratic government in Australia, compared to the Home jurisdiction: the ‘distinctive Australian tradition combined trust of parliament with a constitutional guarantee that the people could control the parliament through the vote’.^{Footnote 111} Blayden explains how many of those civil and political innovations were ‘institutional and regulatory in character’ and bolstered the development of a ‘political culture…. [that] can be seen as not only “majoritarian” but also “bureaucratic”’.^{Footnote 112} In combination with the socio-economic features of colonial socialism, those electoral and regulatory institutions ‘enabled a form of progressive or social liberalism to take a firm hold in the decades prior to Federation’.^{Footnote 113} While the political thought of pre-Federation Australia is still being explored, it is clear that the major break from imperial fidelity did not occur until well into the 20^th century: confirming the unique ‘zero-doctrine’ character of Australian colonial socialism.

(i) Scale-Effects of Federation

Capacity to own and operate the vast public capital built by the colonies was explicitly given to the Commonwealth. Ownership of the most valuable public assets (railways) was not transferred outright, but the Commonwealth was given power to acquire those assets for fair value with the ‘consent’ of their State-government owners.^{Footnote 115} Few States chose divestment, but the framers’ choice to provide that bespoke legislative power shows that the national government was built with capacity to own and operate the vast overland transport networks built by the colonial governments. More importantly, the Commonwealth was given explicit legislative power to ‘construct’ and ‘extend’ railways on the Australian landmass^{Footnote 116}: providing textual proof-positive that the federal government was designed to carry on the public-capital dominance of the colonial states.

Profitable maritime and communications assets were simply ‘transferred’ outright to the Commonwealth. State ‘departments’ responsible for ‘[p]osts, telegraphs, and telephones’ and ‘lighthouses, lightships, beacons, and buoys’ were transferred to the Commonwealth.^{Footnote 117} Following that departmental shift, ‘[a]ll property of the State of any kind, used exclusively in connexion with the department, shall become vested in the Commonwealth’ and any property used for a mixed purpose could be compulsorily acquired for a value fixed by the federal parliament.^{Footnote 118} The Commonwealth was also given explicit power to fix conditions in markets in which public capital dominated. Special provisions were inserted to clarify that Commonwealth legislative power over ‘trade and commerce’ encompassed public-sector operated overland and maritime transport infrastructure.^{Footnote 119} Power over those assets can be understood through the lens of ‘trade and commerce’ not simply because they facilitated private trade but also because they were yield-generating for their government owners.^{Footnote 120}

Notoriously, the Commonwealth obtained power to regulate labour markets, and the first serious disputes regarding the conciliation and arbitration power concerned government employees operating capital assets owned by State governments.^{Footnote 121} Finally, the Commonwealth was empowered to provide public-social insurance on a national level. Authority to legislate for ‘[i]nvalid and old-age pensions’ was an anomalous provision within the national constitutions of the Anglophone world in 1900.^{Footnote 122} It permitted the new federal polity to provide public insurance against life-cycle dependency events to an entire nation.^{Footnote 123}

In each of those cases, substantive legal power was given to the Commonwealth to continue the colonial socialist modes of statehood operated by the defunct colonies, but the financial plumbing to support the Commonwealth’s action as an owner-operator of public capital and social insurance provider was far less clear.

(ii) Nation-wide Credit-Pooling

Although financial pundits emphasised the beneficial scale-effects of Federation on Commonwealth bond prices,^{Footnote 124} foreign inward investment costs for the Commonwealth would be presumptively higher than the colonies unless the new federal polity could re-create the structural features of the colonial socialist phase that neutralised risk-premia for offshore investors. Explicit legislative power was conferred to ‘borrow money on the public credit of the Commonwealth’,^{Footnote 125} but the Constitution provided no clear machinery to empower the new federal polity to achieve the same public-credit status as the colonial treasuries. Importantly, while a ‘consolidated revenue fund’ was created by s 81, it was not automatically charged with debt-servicing costs: a major divergence from the investor-protecting practice of the colonial constitutions,^{Footnote 126} the British North America Act 1867 and the original UK legislation which stapled debt-servicing costs to national tax revenue.^{Footnote 127}

Basic elements of investor protection were, however, entrenched. Power was conferred to make ‘laws conferring rights to proceed against the Commonwealth’^{Footnote 128} which was exercised through the Claims Against the Commonwealth Act 1902 (Cth) which copied the innovative colonial models and required that judgment be given ‘as in an ordinary case between subject and subject’.^{Footnote 129} That temporary legislation was required to ensure that Commonwealth operators of communications infrastructure could be sued and expired upon the enactment of the Judiciary Act 1903 (Cth).^{Footnote 130} Foreign investors’ offshore rights, in the capital markets that mattered, remained protected by the Privy Council’s oversight of the Australian judiciary.^{Footnote 131} The controversial qualifications to Australia’s judicial sovereignty to ensure that (limited exception aside) ‘this Constitution shall not impair any right which the Queen may be pleased to exercise by virtue of Her Royal prerogative to grant special leave of appeal from the High Court to Her Majesty in Council’ were (notoriously) inserted against the wishes of local Australian framers, due to extensive ‘lobbying’^{Footnote 132} in Australia and London by business groups wishing to avoid a devaluation of their colonial assets.^{Footnote 133}

Notwithstanding those investor protections, two major ambiguities remained in the Commonwealth’s financial potency.

First, the terms on which the Commonwealth could finance its owner-operator responsibilities were radically uncertain due to the nebulous legal resolution of ‘the financial question’.^{Footnote 134} As a customs union, Federation would make the colonies’ populations richer through fiscal harmonisation and tariff liberalisation^{Footnote 135}: hence the transferral of customs and excise taxes to the Commonwealth and prohibitions on differential taxation in the Constitution.^{Footnote 136} That model caused an acute problem for colonies which relied on indirect taxes to protect their domestic industry, as cash-pools for daily expenditure and collateral pools for creditors.^{Footnote 137} Federation required politicians to make inter-temporally rational decisions: in the short-run State governments would lose their financial advantages; but, in the long-run, their inhabitants would become richer. Solving that risk/reward calculation nearly destroyed the federal project but the insertion of a complex set of revenue-sharing provisions allowed the drafting process to conclude. They functioned in stages.^{Footnote 138} First, the Commonwealth was clearly obliged to pay 75 per cent of its ‘net revenue’ from customs and excise taxes to the States until 1910.^{Footnote 139} Secondly, from 1901-1905, the Commonwealth was required to create a federal balance sheet which credited States with all revenues collected inside that State and debited States for the Commonwealth’s costs in operating transferred colonial departments and the ‘State’s per capita share of other Commonwealth expenditure’: the ‘balance’ was to be paid to each State.^{Footnote 140} Thirdly, and most problematically, from 1906-onwards, the Constitution provided that ‘the Parliament may provide, on such basis as it deems fair, for the monthly payment to the several State of all surplus revenue of the Commonwealth’.^{Footnote 141} None of the relevant terms (‘may provide’, ‘deems fair’, ‘surplus revenue’) were clearly defined in the Constitution or the Convention Debates. In that way, the ‘surplus revenue’ provision provided no fixed guidance for any government in the Federation regarding how the fiscal revenue could lawfully be distributed. Exactly how and why the Commonwealth would operate valuable public assets and social insurance programs if it was required to remit all operating profits to the States was unclear.^{Footnote 142}

The second financial ambiguity concerned access to sovereign debt. The new Commonwealth would be a competitor against the States in London’s capital markets and it would have a far-weaker bargaining position due to its smaller collateral base (even with transferral of maritime and communications infrastructure) and limited fiscal power. Additionally, as a new and national government it would not enjoy the reflexively low-risk premium given to dependant-colonies,^{Footnote 143} and had no established machinery for sovereign debt management. Those weaknesses in the federal polity’s borrowing capacity can be seen in the Commonwealth’s first major sovereign debt experiment: the Naval Loan Act 1909 (Cth). This odd piece of legislation followed part of the colonial precedents by expressly authorising flotation in London and specifically appropriating the loan proceeds to ‘the initial cost of a Fleet Unit for the purpose of the Naval Defence of the Commonwealth’.^{Footnote 144} The Act diverged from the colonial practice in other ways which revealed the Commonwealth’s weakness as a sovereign borrower, most visibly in its (bizarrely strict) offshore-investor payment clause.^{Footnote 145} To further convince investors of its credit, the Act created a sinking fund to be credited annually with 5 per cent of outstanding debt until the loan matured, with proceeds paid personally to officers of the House of Representatives, the Senate and the Executive to be held on trust.^{Footnote 146} The most revealing concession to the Commonwealth’s shaky credit was the debt’s interest rate: set by the Act at 3.5 per cent, which was 0.5 per cent higher than NSW bonds. One reason for the Commonwealth’s worse credit was explained by the Treasurer on the Bill’s reading: compared to the former-colonies, the Commonwealth had not yet built up a portfolio of yield-generating assets to collateralise its debt.^{Footnote 147}

The Commonwealth’s uncertain balance-sheet position created obvious conflicts with the recognition, elsewhere in the text, of the potent egalitarian state model. The High Court resolved the first major conflict resoundingly in favour of financial empowerment in the Surplus Revenue Case ^{Footnote 148} thereby setting the course for the nationalisation of the colonial socialist heritage.

(iii) Judicial Power and Socialism without Doctrine

The Surplus Revenue Case has largely been analysed as a simple dispute between the Commonwealth and the States. On that account, the Commonwealth sought to hide its surplus revenue from the States by squirreling it away in trust accounts,^{Footnote 149} and the High Court, without strong reasons, endorsed that behaviour, setting the ‘vertical fiscal imbalance’ in train.^{Footnote 150} While the case certainly did empower the Commonwealth at the expense of the States, it has a significance beyond internecine federal conflict. The Surplus Revenue Case resolved critical problems with translating colonial socialist technique to the new federal polity, the role of the judiciary in solving those problems and confirmed, via the referendum which confirmed its result, support from the constituent power for the nationalisation of the potent egalitarian state model developed pre-Federation.

The Surplus Revenue Case was triggered by the legislative creation of a system of public investment funds for public capital works and social insurance.^{Footnote 151} A set of ‘Trust Accounts’ was created by the Audit Act 1906 (Cth) for the purposes of building defence infrastructure, paying pensions and facilitating the Commonwealth’s domestic and international payments. Trust accounts could be credited with money voted by parliament, but also with revenue generated by assets built using the trust funds. Money in trust accounts could only be spent on the listed purpose and the Treasurer could invest any positive balances in fixed income securities or bank accounts. Those trust funds were national investment accounts for infrastructure and social insurance: they contained accumulations of fiscal receipts for future investment projects.

Eighteen-months later, the Commonwealth parliament enacted the world’s first national universal (non-contributory) invalid and old-age pension legislation^{Footnote 152}: replicating the progressive NSW model by providing public social insurance to people over 65 years or ‘permanently incapacitated for work by reason of accident…or by being an invalid’.^{Footnote 153} Payment of pensions would occur out of money ‘appropriated by Parliament for the purpose’.^{Footnote 154} On the same day, legislation authorised payment of £750,000 out of consolidated revenue, and appropriation, for the purpose of the ‘Trust Account…known as the Invalid and Old-age Pension Fund…for Invalid and Old-age Pensions’.^{Footnote 155} Later that day, a further Act authorised payment and appropriation of £250,000 ‘for the purposes of the Trust Account known as the Harbor and Coastal Defence (Naval) Account…for Harbor and Coastal Defence (Naval) purposes’.^{Footnote 156} Three days later, the Surplus Revenue Act 1908 (Cth) entered into force, providing that credits in those pension and infrastructure trust ‘shall be deemed to be [Commonwealth] expenditure’^{Footnote 157} and their underlying appropriation ‘shall not lapse nor be deemed to have lapsed at the close of the financial year for the service of which it was made’.^{Footnote 158} That legislation was designed to exploit the textual ambiguity in s 94 (‘the Parliament may provide, on such basis as it deems fair, for the monthly payment to the several State of all surplus revenue of the Commonwealth.’) by ‘providing’ that fiscal receipts held in trust were ‘debited’ from the amount of annual ‘revenue’ for calculation of a ‘surplus’.

NSW sued the Commonwealth, contending that the Constitution prevented the federal government from accumulating fiscal receipts for future public capital formation and social insurance projects. Formally, the case turned on whether public money paid from the Treasury under a statutory appropriation into a statutory trust account had been ‘expended’^{Footnote 159} and could be excluded from any ‘surplus revenue’.^{Footnote 160} NSW argued, by analogy with private sector accounting practices,^{Footnote 161} that money which remained inside the public sector at the end of a financial reporting cycle had, definitionally, not been ‘expended’ and was ‘surplus’. The State also invoked supposed constitutive intentions, alleging that ‘[t]he States did not intend that large spending powers should be given to the Commonwealth’ and that ‘[n]o power to accumulate revenue for several years was intended to be given’.^{Footnote 162}

The Commonwealth countered that it was given unique powers by the Constitution which ‘cannot be effectively executed unless there is also a power to set aside large sums of money for future expenditure’: offering as examples ‘bounties, borrowing, defence, State banking, and immigration’.^{Footnote 163} More importantly, the Commonwealth argued that ‘before Federation’ colonial governments created statutory ‘trust accounts’ for investment projects treated funds in statutory trusts ‘as expenditure’.^{Footnote 164} The Commonwealth used that colonial socialist heritage as the foundation for their preferred interpretation of s 94 (money is ‘expended’ when ‘appropriated’): ‘that is a natural meaning of the word “ expenditure” in connection with Government accounts and the establishment of a system of constitutional government’.^{Footnote 165} The Commonwealth argued that ‘the Parliament is invested with the same powers of appropriation for specific purposes as are the State Parliaments in respect of their revenue’^{Footnote 166}: thus making a claim to having inherited the same state model, at least regarding financial potency, from the colonial governments. Ultimately, the Commonwealth argued that accumulation of fiscal receipts were necessary to develop, operate and own large capital assets and social insurance schemes.

It was clear during oral argument that the States’ private-sector accounting argument faced strong headwinds. Justice O’Connor immediately raised the quandary they posed for the federal government’s capacity to develop a public capital base: ‘In your view, if the Parliament desires to spend £2,000,000 on warships and not to pay for them out of one year’s revenue, it could not before purchasing set aside a yearly sum out of revenue until the amount was made up, but would have to borrow the money?’^{Footnote 167} Plaintiff’s counsel’s response indicated the farcical consequences of its argument ‘[e]ither that or pay in instalments’.^{Footnote 168}

The High Court’s unanimously upheld the constitutionality of the system of national investment established through the ‘trust account’ legislation. The case is often cited for simple propositions that once ‘appropriated’ by legislation, Commonwealth money stood outside the concept of ‘surplus’.^{Footnote 169} While a technically correct summary of the case, none of the judges rested their reasoning on that abstract proposition^{Footnote 170}: all judges reinforced their reasoning by reference, expressly or implied, to the features of the colonial socialist state.

Central to Griffith CJ’s reasons (the most austere of the Court) was his understanding that government’s core functions include long-term enterprises involving extensive financial obligations: ‘the operations of government are continuous and extend over long periods…the word ‘surplus’, used in such a connection, must therefore be read in a sense which recognizes this condition and gives effect to it’.^{Footnote 171} Justice O’Connor more explicitly linked the need for an expansive meaning of ‘surplus’, and ‘expenditure’, to a model of constitutional government which was (both) a major actor in the financial system and involved in public investment. In rejecting the State’s argument, he said^{Footnote 172}:

The ‘well recognized methods of public finance’ and the ‘system of parliamentary government’ must be references to the colonial legislation concerning public works and social insurance legislation raised by the Commonwealth’s counsel in argument.^{Footnote 173}

Other judges relied explicitly invoked the need to effectuate the Commonwealth’s substantive legislative powers, particularly concerning infrastructure development and debt finance. Justice Higgins explicitly invoked the impossibility of constructing major public capital if the ‘trust account’ system were invalidated: ‘If this claim is right, the Commonwealth Parliament has no power to provide out of its revenue in fat months for expenditure which it foresees in the near future say for naval defence, or for financial assistance to a State (under s 96 of the Constitution); and the power of the Commonwealth Treasurer in making financial arrangements must be grievously crippled’.^{Footnote 174} The latter reference to the Treasurer’s power to make ‘financial arrangements’ would have included the power to acquire debt capital, raised in argument by the Commonwealth.^{Footnote 175} That imposing a strict operational-cost limitation on the Commonwealth would ‘grievously cripple’ such a power, again, only makes sense when one recalls the enormous role of foreign investor credit arrangements in building the version of Australian statehood that emerged from the colonial phase. Justice Barton adverted to the same consideration when reasoning that the ‘the construction contended for is plainly unreasonable…it would have the effect of dislocating the whole financial system… Are the hands of the Commonwealth to be tied thus against the interests of all concerned’.^{Footnote 176}

Justice Isaacs’ reasons brought each of those features together. From the outset of his reasons, Isaacs J emphasised the link between maintaining a rational system of investment funds and the Commonwealth’s role as a developer of public capital:

He then relied heavily on an expansive understanding of constitutional statehood to reject the State’s argument explaining that it would undercut the ‘creation and maintenance of the Commonwealth’ as a ‘scheme of government…proceeding for the effectuation of its purposes on traditional lines of parliamentary and responsible government’ which included those hallmarks of colonial socialism: public-credit pooling (acquiring ‘debt’ and paying ‘a judgment’) and public social insurance (‘an Act conferring bounties or old-age pensions’).^{Footnote 178}

Ultimately, Isaacs J rested his decision on a view of the Constitution that permitted the Commonwealth the same economic capacity as recently transformed colonial governments^{Footnote 179}:

With perfect hindsight the Surplus Revenue Case certainly facilitated the growth of Commonwealth government power over the States.^{Footnote 180} Viewed in its period, it performed an equally momentous but less partisan function: it confirmed that the new federal polity would have the same financial capacities which were integral to pre-Federation colonial socialist models. What Saunders has described as the ‘emergent link between borrowing and revenue distribution’ was patent in the dual proposals for constitutional alteration presented to electors in the 1910 referendum.^{Footnote 181} Two amendments were proposed: the first to permit the Commonwealth to assume State Debts (incurred post-Federation); and the second to un-wind the Court’s decision in the Surplus Revenue Case. The first proposal passed and the second was rejected, securing the Commonwealth with the full panoply of financial powers necessary to implement the potent egalitarian constitutional model developed in the colonial phase.

(i) The People’s Budget and Westminster Constitutionalism

The British constitution was transformed in the 20^th century’s first decade by the violent parliamentary dispute that arose from legislation designed to fund social insurance (old-age pensions) and public capital (naval infrastructure). Between 1908 and 1910, British Cabinets formulated plans to provide universal old-age pensions and win a growing arms race, to be funded by significant increases in taxation in the form of land-value taxes.^{Footnote 182} Compared to the generosity of contemporaneous Australian public sector expansions, the proposals contained in the ‘People’s Budget’ were modest, but they were vetoed by business and aristocratic elites in the House of Lords on the basis of conflict with liberal values of private property protection.^{Footnote 183}

The inter-cameral conflict was resolved by the Cabinet inviting the King to re-constitute the Lords with more progressive members until the upper house passed the gridlocked social insurance and public works legislation. Rather than being inundated with progressive members,^{Footnote 184} the Lords agreeing to enact the Parliament Act 1911 (1 & 2 Geo 5 c 13). The preamble of that Act recited that ‘whereas it is intended to substitute for the House of Lords as it at present exists a Second Chamber constituted on a popular instead of hereditary basis, but such substitution cannot be immediately brought into operation’. The first operative provision of the Act striped the un-elected Lords of their legislative power over money bills:

Thereafter, the centuries old Westminster Parliament was reduced, when it mattered, to a unicameral body.

The vociferous institutional reactions to the People’s Budget appear inexplicable, until one reviews the orthodox constitutional ideology of the period. Dicey, the unrivalled constitutional theorist of British laissez faire,^{Footnote 186} viewed later-19^th century political claims for an economically interventionist and re-distributive government as the end-point on a constitutional journey from liberalism to ‘collectivism’ or ‘socialism’. He did not argue that such a development was desirable, preferring to depict progressive taxation,^{Footnote 187} trade-unionism and old-age pensions as types of ‘evil’^{Footnote 188}: the latter being a particularly odious type of society-wide institutionalised corruption.^{Footnote 189} Those ‘definite socialistic formulas’^{Footnote 190} were objectionable on classic liberal grounds:

Those views describe an entirely alien landscape from the vantage point of Australian constitutionalism in 1911, in which it was accepted by constitutional text, judicial authority and referendum that all levels of the federal government were empowered to own and operate public assets for profit and provide progressive social insurance. Yet, Dicey is still treated as a starting point for Australian constitutional analyses and understood as expressing ‘prototypical’ views about the ‘essence’ of Australian constitutional principles.^{Footnote 192} Let us not forget that Dicey himself was aware of the gulf between British and Australian practice and remarked that ‘socialistic legislation and experiment have been carried to a greater length in Australia than in England’.^{Footnote 193} This awareness of the large gap between British and Australian constitutional practice is also evidenced, in more neutral terms, in the work of Dicey’s intellectual counter-point, FW Maitland.^{Footnote 194} No constitutional re-ordering was required to implement social-insurance or public capital growth programs in Australia because the constitutional model had been built to accommodate those types of state directed economic activity. What Australia achieved by consensus constitutional formulation, could only be achieved in Diceyan Britain through extreme constitutional conflict.

(ii) New Deal Re-Founding Washington Constitutionalism

A similar gulf appears between the models of US and Australian constitutionalism of the early 20^th century. Again, a defining constitutional conflict (‘moment’)^{Footnote 195} arose from welfarist policies twinned with vast public works programs: the Supreme Court’s opposition and then capitulation to Roosevelt’s New Deal policies.

Reflecting the vastly different scale and size of economic and social disorder in 1930s America, New Deal policies were rolled-out on multiple fronts: first monetary and financial, then public works programs and finally universal social insurance.^{Footnote 196} At each step, constitutional obstacles appeared. The Supreme Court decision which upheld the validity of legislation suspending the Gold Standard (required to increase deficit spending to a major financing vehicle of New Deal programs, the Reconstruction Finance Corporation)^{Footnote 197} was a single-judge majority resolved on the basis of exigent circumstances, rather than principle.^{Footnote 198} The New Deal’s flagship economic regulatory legislation, the National Industrial Recovery Act,^{Footnote 199} was twice found invalid for impermissible delegation of legislation authority to the executive branch.^{Footnote 200} Alongside these staples of federal socio-economic reform, the Supreme Court also invalidated State labour protection laws and (provocatively) Roosevelt’s termination of economic officials on constitutional grounds.^{Footnote 201}

Faced with those constitutional obstacles, Roosevelt relied on a similar institutional strategy to the British cabinet in 1911^{Footnote 202}: he threatened to increase the number of judges on the Supreme Court until it accommodated his vision for a more economically interventionist state.^{Footnote 203} While academics debate whether the eponymous ‘switch in time that saved nine’ was a direct result of Roosevelt’s high-stakes threat,^{Footnote 204} the Court’s timely shift to an accommodative posture led to major victories for ‘second’ New Deal legislation: including, germane to the comparison with Australia, the financial framework of universal social security.^{Footnote 205}

In comparative perspective, a striking feature of American constitutionalism in the 1930s was the immense constitutional conflict and re-structuring required to implement state-economic interventions. In addition to the political and social dimensions of New Deal conflicts, constitutional ideas were invoked as conclusive arguments against the roll-out of social insurance, public capital development and public employment. Unlike the UK, the principal constitutional impediment was not parliamentary; judicial doctrine entrenched laissez-faire conceptions of non-state intervention in economic relationships. Remodelling that doctrine required the threat of fundamental institutional transformation, creating a ‘new economic order’,^{Footnote 206} and, in the hindsight of latter legal scholars, effected a ‘re-founding’ of basic constitutional norms.^{Footnote 207}

Compare those ructions with the Australian experience. A constitutional model of a potent egalitarian state accreted during the colonial phase which was then drafted into the federal constitution. The first major judicial conflict concerning that model turned on which government (federal or State) had the financial capacity to carry out long-run investment projects, not whether such projects were in toto unconstitutional. The judiciary facilitated the nationalisation of social insurance and public capital development and the electors approved that outcome through referendum. In comparison with the USA, early 20^th century Australian constitutionalism was not a viable field of battle to contest the balance of states and markets because a process of popular and technical consensus approved that balance in favour of an interventionist and compassionate state with an outsized role in a market economy. That conclusion does not imply a total absence of constitutional dispute over government intervention in commercial behaviour. The early High Court did strike down federal anti-trust legislation on constitutional grounds and three referenda failed to insert explicit legislative power to regulate monopolies and oligopolies into the Constitution.^{Footnote 208} Even then, the Australian judiciary did not create the same absolute prohibitions as the US Supreme Court: the federal limitations in Huddart Parker left the States free to create their own anti-trust law, while the Lochner-era doctrine prohibited all arms of government from impeding on private law contracts.

(iii) Potent Egalitarian Statehood in Retrospect

If accepted as a useful analytical device, greater scholarly work would be required to understand how the model of potent egalitarian statehood developed after the Surplus Revenue Case. That exercise would require a discrete analysis of individual heads of legislative power and their limitations, in light of the features of the colonial socialist state. At a doctrinal level, it would involve the complex question of the interaction of discrete constitutional provisions with broader constitutional ideas, a process Australian lawyers understand as involving ‘implications’.^{Footnote 209} Hard questions arise which cannot be answered in the general case: for example, whether the meaning of ‘property’, ‘acquire’ or ‘just terms’ s 51(xxxi) is expanded or narrowed by references elsewhere in the text and structure to the Commonwealth’s power to own and operate valuable assets for public benefit?

In a more socio-legal mode, historical work would be required to examine whether and how ideas of constitutional statehood developed during the colonial socialist phase maintained their normative pull on judges and electors throughout the 20th and 21st centuries. Wary of the labour-intensiveness of that process, some preliminary observations are offered on some higher-profile cases. Attorney-General (Vic) ex rel Dale v Commonwealth (the ‘Pharmaceutical Benefits Case’)^{Footnote 210} provides a complex case-study in authorising the Commonwealth to fund social insurance, while preventing it from regulating the commercial relationship between end-users and providers of medical service providers. Tentatively, this could be understood as consistent with the colonial socialist heritage insofar as the government was empowered to fund the provision of welfare, but prevented from substituting the market-based system. The same observation applies to Bank of New South Wales v Commonwealth (the ‘Bank Nationalisation Case’).^{Footnote 211} The potent egalitarian state that emerged from the colonial period relied heavily on the existence of private financial markets, and enticed them with public protections, rather than co-opting them through legislative fiat. The 1947 bank-nationalisation legislation sought to disrupt a prime mover of the colonial socialist economy: institutional debt markets. In that sense, the High Court’s constitutionalised antipathy to Chifley’s scheme was not a sharp break from the pre-Federation political economy.^{Footnote 212} Victoria v the Commonwealth and Hayden (the ‘AAP Case’) is also, prima facie, consistent with the potent egalitarian model insofar as it facilitates public-social insurance and public capital creation and avoids erecting judicial obstacles to those functions.^{Footnote 213} The hardest series of cases to fit within the model of constitutionalism that emerges from the colonial socialist phase are also the most distant in time: the Combet, Pape and Williams line of authority.^{Footnote 214} Those decisions draw heavily on Diceyan ideas of statehood which appear to sever them from the distinctively Australian model of statehood entrenched in the Constitution. They envision a Commonwealth executive kept ‘controlled’ by a robust Parliament, citing pre-Federation British arrangements in support and appear largely unaware of the sizeable gulf that had grown between Australia and the Home jurisdiction by the time of the Convention Debates. Although the durability of that line of doctrine is unclear,^{Footnote 215} its existence illustrates that future questions of Australian constitutionalism cannot be answered by simple invocation to the model of the potent egalitarian state entrenched at Federation.