A great many of the changes in Australian federalism have flowed from the failure of the Finance clauses (Chapter IV) of the Constitution to avoid the increasing centralisation of financial power.

Within a few years of Federation, the Commonwealth was finding the financial arrangements irksome, due to the need to make unexpectedly large expenditures of its own in such areas as defence, public works and social services. It was therefore soon working to undermine the government finance guarantees.

The states were powerless to resist.

As early as 1902 the Commonwealth Attorney-General, Alfred Deakin, had made his oft-quoted claim that the states were "legally free, but financially bound to the chariot wheels of Central Government".

By the end of the first decade, when sections 87 (payment of customs and excise takings to the states) and 94 (distribution of surplus Commonwealth funds to the states) had been allowed to fall into disuse, the pattern of Commonwealth financial dominance and relative state penury had been established.

Commonwealth and state governments soon came to see there was a need to deal with the collapse of the constitutional financial arrangements. A constitutional means was at hand in the form of s. 96:

... the Parliament may grant financial assistance to any state on such terms and conditions as the Parliament thinks fit.

A last-minute addition to the Constitution, the section was believed to have been inserted only for use in times of financial emergency.

A major step in 1910 was for the Commonwealth to begin using s. 96 to make annual `topping up' payments to each state to help them deliver services to their populations. Despite this, Western Australia and Tasmania were still unable to cope, and within two years extra payments were being made to these states.

Not surprisingly, all states were soon depending upon s. 96 grants to help them meet their financial needs, a dependency that has, in fact, increased in the years since. By 1928 the Commonwealth had also forced the states to accept the newly-created Loan Council, which henceforth controlled all government borrowings, both Commonwealth and state. Each of these two developments further undermined the constitutional provisions.