1 ECON3600 3. 1890 – 1929 NEW EXPANSION AND THE .docx

1
ECON3600
3. 1890 – 1929: NEW EXPANSION AND THE SLIDE INTO
DEPRESSION
The Depression of the 1890s
The crunch came at the end of the 1880s with a collapse of the
land and housing boom
and a virtual cessation of the previously large capital inflow. As
was the case with the
boom in capital inflow and investment in the previous decades
the drying up of funds and
the cutback of investment expenditure after 1890 is explained
by both demand, and
supply, factors.
On the supply side for example there was a general
disenchantment in Great Britain with

foreign investment (arising particularly from the failure of
investments in Argentina) and
associated with a downturn in the British economy itself.
On the demand side a sharp fall in the price of wool
(determined essentially by factors in
Great Britain over which Australia had no control) gave further
emphasis to the poor and
declining returns from investment in the pastoral industry.
Adding to this was the
realisation that the return on funds borrowed by governments
and spent largely on
railway building and operation had been at best very modest.
This served to subdue the
incentive to invest and, accordingly, the demand for investible
funds.
Capital inflow, which had been essential to the maintenance of
the aggregate expenditure
on which the prosperity of the 1880s rested, fell in the first half
of the 1890s to a level of
only about one quarter that of the late 1880s.
As a result there was a dramatic fall in investment expenditure
and, with it, in the general

level of economic activity and employment. Between 1891 and
1895 one estimate
(Jackson) puts the fall in GDP at as much as 20%. With
population still increasing,
though at a much lower rate than in previous decades (mainly as
a result of a cutback in
immigration), the rate of increase in GDP/head fell by an even
larger amount (in fact
became negative).
The collapse of financial institutions
A particular feature of the 1890s depression was extreme
monetary instability and the
collapse of a large number of financial institutions.
While (as noted) overseas funds had financed much investment,
a good deal of it also
came from Australian financial institutions, mostly banks.
These were particularly
exposed to the land and construction boom – particularly in
Victoria but also in other

2
colonies, including Queensland. The collapse of the boom along
with the collapse in the
investment boom in other areas of the economy led to the
inability of debtors being able
to service their debts; to the personal bankruptcies of many who
had borrowed money to
take part in the boom; and, accordingly, to the insolvency of
many financial institutions.
The problems spread throughout the financial sector such that
by 1893 over half the
major banks in Australia had either folded or suspended
operations pending
reconstruction.
But all this was only a reflection of the basic imbalance that had
developed in the
economy, and fact that borrowing, and the investment that was
undertaken with borrowed
funds, had in the 1880s lost touch with the reality of the long-
run returns possible from
the economic base.

Recovery
Recovery from the depression during the decade of the 1890s
was protracted, not only by
the severity of the downturn itself but by drought in the second
half of the 1890s and,
perhaps more significantly, the fact that, economically, there
was ‘nowhere to go’.
In other words, there was no basis for renewed economic growth
– no ‘model’ of
economic development other than that based on the pastoral
industry.
Diminishing returns to investment in the pastoral industry –
apparent in the 1880s as
wool-growing was extended into less productive geographic
areas – had been masked by
the overly optimistic continuation and extension of investment
(both private and public)
that had been related to it.
But the pastoral industry – still of course the principal
economic base of the economy –

did not provide a basis for significant economic expansion and
certainly not for economic
growth (the latter requiring increases in productivity).
Wool production, and sheep numbers, actually fell during the
decade. As a result,
economic conditions were depressed right through the decade
and even the later years of
the 1890s showed relatively little growth.
To the extent that there was economic recovery at all during the
1890s it came from three
sources:
the pastoral industry to the production of meat
rather than wool, a
shift that was enabled by advances in the application of
refrigeration to overseas
shipping and thus the possibility of developing frozen meat
exports. These rose
substantially during the 1890s.
on the farming of
land (particularly for wheat production) and dairying. The latter

was particularly
aided also by refrigerated shipping which allowed for the export
of butter. It’s in
3
these developments that we can see the beginnings of the third
phase of ‘old
model’ economic development (recall that this ‘third phase’ was
based on the
more intensive use of land for new purposes and is dated from
the late 1890s to
the late 1920s); and, thirdly
This led to a new gold
rush and consequences for Western Australia similar to those
for the colonies of
Victoria and New South Wales in the 1850s.
In respect of the last of these – as had been the case in the
1850s – the gold rush of the
1890s had some (albeit limited) consequences for other
colonies. The migration of large
numbers of people from the eastern states to the west absorbed

some of the surplus labour
that had been created by the depression; the rising volume of
consumer demand in the
west meant that the market for food and manufactured goods in
the east was to some
extent enlarged; and the sending back to the east of funds from
people making large
incomes from gold production in the west was an element in
maintaining aggregate
demand in the depressed eastern states.
For all that, the colonies other than Western Australia remained
in a very subdued
economic state throughout the 1890s and the reason for the fact
that the growth in
aggregate ‘Australian’ GDP (indeed for the fact that there was
economic expansion at
all) was the result largely of the expansion in gold output from
the west.
At the end of the century…
By the end of the nineteenth century, on the eve of the
federation of the colonies to form

the Commonwealth of Australia, wool remained by far the most
important sector of the
economy and the most important export commodity, and
Australia continued to be
(probably) the richest country in the world (at least on the basis
of the measure of
GDP/head).
But for about the last quarter of the century the gap between
Australia and other countries
had been narrowing as productivity increases based on
investment in wool-growing
progressively diminished. And, because investment based on the
model of economic
development that revolved around the pastoral industry outran
the returns from that
investment, a correction was inevitable. The longer such
investment continued to outrun
the returns – a phenomenon that occurred through the 1880s –
the sharper was the
correction. The correction eventually came in 1890 and ushered
in a decade of
depression.

Continued economic expansion and economic growth in the new
century was to depend
on a new basis: the use of land for ‘new’ purposes. This
constituted the third phase of
Sinclair’s ‘old model’ economic development. It was already
under way by the turn of
the century and was indeed what pulled the economy out of
depression.
4
Nature and basis of the third phase of old model development
This was based on what is often termed the diversification of
primary production. While
wool production remained the major primary activity the period
saw the rapid
development of dairying, the farming of land for crops such as
wheat, and the
development of other rural industries such as fruit-growing and
(in Queensland in

particular) sugar, along with the production of meat from the
pastoral industry.
This phase of development is explained partly in terms of lower
profitability of wool-
growing but also in terms of some significant technological
advances.
The first of these was the cheap provision of refrigerated
shipping. The production of
primary products relied heavily on being able to export them.
This was made possible in
the case of a much wider range of commodities – starting with
meat but applying also to
the products such as those of the dairy and fruit industries – by
the advent of refrigerated
shipping. Improvements of a more general nature in ship design
also implied a general
reduction in freight rates.
Of even more significance were technological advances in the
growing of wheat. New
strains of wheat which were resistant to Australian diseases, and
advances in wheat
farming techniques via methods of fallowing and the use of

fertilizers, also permitted
rapid advances in the growing of wheat, again largely for
export.
The consequence was that somewhat tentatively during the
decade of the 1890s, but more
decisively in the early part of the twentieth century, these new
rural industries became the
source of productivity increases which resulted in rates of
economic growth that rivaled
those achieved in the peak of the second phase of old-model
economic development.
And, as had been the case in the earlier period, these increases
were materially boosted
by the investment – both private and public – that was
undertaken to support the
development of these new industries. The most important
category of such investment
was by governments in railways, particularly in the extension of
the branch railway
network, and in other infrastructure to support the new rural
industries, particularly in the
form of irrigation schemes.

The first of these (railway construction) was a major
characteristic of the period. From
the 1900s governments of all of the states (as the colonies came
to be termed after
federation) embarked on railway building programs to rival
those of the 1880s, now
focusing almost entirely on the construction of branch lines to
fill in the trunk network
and service the more intensive settlement of land that was
associated with the
development of the new rural industries such as wheat and
dairying.
As had also been the case in the period before 1890, much of
this investment was based
on borrowing from overseas, particularly in the case of
governments both of the states
5
and commonwealth which both went on another borrowing
binge to finance huge
expenditures particularly on railways.

The increases in productivity that accompanied these
developments – at least in the early
stages – and the resulting expansive view of the potential of
Australian rural
development, called forth a large increase in population. It did
this particularly through
immigration, which resumed after about 1905, and then reached
unprecedentedly high
levels in the few years between about 1910 and the outbreak of
the First World War
(when it virtually ceased). Following the War immigration
resumed and the early years of
the 1920s were also characterised by high levels of immigration
– though not as great as
that in the few years before the War and declining in the later
years of the decade.
The manner in which this phase of development was seen to
provide the basis for a rapid
increase in population was indeed a source of great excitement
on the part of
governments, and in particular the Commonwealth government
which was increasingly
adopting a national perspective.

(In the early 1920s the Commonwealth government was led by
the famous Billy Hughes;
after 1923 the government was a coalition between the two main
conservative parties,
one of which was the newly-formed Country Party [which
changed its name in the 1980s
to the National Party] (thus establishing the ‘coalition/Labor’
political division which has
prevailed until the present time). The government after 1923
was led by Stanley
Melbourne Bruce and the Country Party by Earle Page, the
government being known as
the Bruce-Page government.)
Perhaps the over-riding goal of governments at this time – a
goal which was the basis of
economic policy which shaped economic development during
the 1920s – was an
increase in population.
At federation the population of all the states totalled less than 4
million and there was a
feeling among policy-makers that this was a disproportionately
– even dangerously –

small number of people to be in charge of such a vast continent
possessing huge natural
resources. (The term ‘populate or perish’ is identified
particularly with the post-Second
World War period but the term was in vogue much earlier.)
The pastoral industry, which had been the basis of old-model
economic development in
the nineteenth century, did not require much labour, the
expansion and economic growth
that was based on it in the second phase of old-model
development having stemmed
largely from making the activity more capital intensive.
By contrast the new rural industries were much more labour
intensive (in other words
activities such as dairying, the farming of crops and the growing
of fruit required much
more labour per unit of output than had wool-growing). As a
result they held much
greater possibilities for the absorption of more people.

6
It is for this reason that governments – initially of the states but
increasingly the
commonwealth government – acted to facilitate and encourage
the development of these
industries and the immigration to provide the labour to further
develop them.
And just as was the case in the period before 1890, there was
increasing investment –
both private and public – in housing and construction, and in
social overhead capital to
meet the needs of the larger population.
Thus in many crucial respects the pattern of development in this
phase paralleled that
which occurred during the second phase of old-model
development (especially in the
decade of the 1870s), except that it was now based on the more
intensive use of land in
the new primary industries and not just wool-growing as had
been the case in the earlier
period.

Effects of the First World War
This pattern of development was temporarily interrupted by the
First World War.
During the period of the War itself (1914 - 1918) both economic
expansion and, because
population kept increasing albeit slowly, economic growth, to
an even greater extent, was
negative.
An immediate consequence of the War was the departure of
large numbers of men to
fight in the War (and to die in large numbers). This took out of
the system both a large
amount of aggregate demand, and aggregate supply, particularly
of the resource labour.
The virtual cessation of capital inflow (and hence the
curtailment of investment
expenditure) also had a significant negative effect on aggregate
demand.
There was some impetus to Australian manufacturing industry,

although the net effect of
this on the level of GDP per capita may well have been negative
as the new
manufacturing industries were less efficient than those that had
hitherto been the source
of these goods, and the disruption to world trade caused by the
war forced them to use
higher-cost inputs from alternative sources.
However, after the War was over the pattern of economic
development in the period from
the recovery from the 1890s Depression to 1914 did not simply
‘resume’. In the words of
one economic historian there was no return to ‘normalcy’
7
The 1920s

Yet governments (at both the national and state level) acted - in
large part at least - as if
this were the case. In essence they saw on-going, and
increasing, prosperity based on the
plentiful resource land and the ‘new’ rural industries
The growing of wool remained the most significant industry in
terms of the income that it
directly and indirectly created. But it was activities such as
dairying, the farming of wheat
and other crops and the growing of fruit – for all of which there
was a large market within
the British Empire and particularly in Great Britain itself – that
were seen to constitute
the basis for further economic development and in particular the
economic expansion that
would allow the much sought-after population increase.
Accordingly these industries were enthusiastically embraced by
governments who
resumed a borrowing and spending binge in the public
investment that was seen as
necessary to support this development. Investment was
undertaken particularly in

railways and other infrastructure to support land development,
particularly irrigation
schemes, and also on urban infrastructure.
All this came together with the establishment by the
Commonwealth government in 1926
of the Development and Migration Commission. This was
designed to be an expert body
to advise the government on land development schemes which
could serve as vehicles for
furthering economic development and in particular the
‘absorption’ of immigrants in
rural industries.
But economic development was held back (markedly so after
mid-decade) by a number
of factors.
Legacies of the War
One of the legacies of the War arose from the high level of
indebtedness created by the
War. Whilst Australia was not directly involved it nevertheless
sent a large number of

persons to fight in the venues of war (mainly in Europe) and
incurred a large amount of
related expenditure. By the closing year of the War it has been
estimated that more than
half of the commonwealth government’s expenditure was war-
related. This remained the
case into the 1920s. This expenditure was in the forms for
example of war pensions,
interest on war loans and repatriation expenditure.
Of more enduring significance was the effect of the War on
international economic
relationship and on international trade flows. This was
particularly significant for
Australia as so much of its industry was export-dependent.
Increasingly, during the
decade of the ‘20s, world prices of most of the commodities that
Australia exported fell.
8

The Slide into Depression
Even as the Development and Migration Commission was being
established, the
individual entrepreneurs who had been part of this new rural
development had a much
less than rosy view of the productivity of the new primary
industries and the income to be
made from them.
In part this had been the result of the falling prices for many of
the products on world
markets – on which of course they depended so heavily.
More fundamentally it followed from declining productivity in
nearly every one of the
new rural industries on which the renewed expansion had been
based. This occurred
principally because as production was increased, it was pushed
into relatively less fertile
and less well-watered land.
One of the clearest documentations of this phenomenon was in
fact provided by the early

reports of the Development and Migration Commission.
Established as a means of
charting the most effective way of further exploiting the land to
absorb larger numbers of
immigrants, the reports of the Commission served merely to
highlight the unprofitable
nature of most of the development schemes.
In fact the later years of the 1920s bear an eerie similarity to
the later years of the 1880s.
By this time there was much disquiet being expressed about the
level of indebtedness of
both state and commonwealth governments and by the fact that
the revenue that was
being generated – either directly by government business
enterprises, particularly
railways (into the construction and operation of which
governments has spent so much
borrowed money) or indirectly through the revenue generated by
the rural industries –
was declining. This in itself meant that both borrowers and
lenders were beginning to
fundamentally review the basis on which they were lending,

borrowing and spending.
By the late 1920s government investment was in fact already in
the process of being cut
back in the face of the deteriorating profitability of the
industries on which it had been
based.
However, these factors, which were ‘internal’ to Australia, were
swamped in late 1929 by
a spectacular stock market crash in the United States and the
onset of a general economic
collapse which spread around the world.
A Final Note on the 1920s - The Ambiguity of the Development
of Manufacturing
through the Policy of Trade Protection
There seems to have been almost universal agreement among
policy-makers and
contemporary analysts of economic development that future
prosperity depended
essentially on the use of land by the ‘new’ rural industries.

9
The government for most of the decade (from 1923 - 1929) was
the first coalition
between conservative parties in which the relatively new
political party representing rural
interests (the Country Party) was a member, thus exerting
considerable influence on
behalf of rural producers. Furthermore the Prime Minister
(Stanley Melbourne Bruce)
saw himself as a loyal member of the British Empire and
(tacitly at least) affirmed
Australia’s ‘place’ as a supplier of rural products to the centre
of the Empire, while
drawing on it for manufactured goods.
It thus appears as something of a paradox that the Bruce-Page
government (Earle Page
being the leader of the Country Party) presided over a very
marked increase in the level
of tariffs on a wide range of manufactured goods (taxes on
imports).

There were a number of reasons for this.
Firstly the Great War of 1914-18 had served to emphasise the
dependence of Australia on
manufactured imports and in any case the ability to be more
self-sufficient in regard to
manufactured goods was seen to serve the national interest.
Secondly there was an awareness of the way in which
manufacturing industries could
create employment to sustain a population increase. One of the
characteristics of the wool
industry had been that it required relatively little labour to
produce the golden fleece (the
pastoral industry was not labour-intensive) – a factor
responsible in large part for the
quite unequal distribution of the high average level of income
and wealth enjoyed by
Australians in the nineteenth and early twentieth centuries. The
new, more labour-
intensive rural industries promised to have greater powers to
absorb people (the
‘absorption’ of people into the nation was a major
preoccupation at the time). But even

more so did manufacturing; and manufacturing brought with it
as well the opportunity to
distribute the high average level of income more evenly through
the community. (Indeed
the policy of the minimum, or ‘basic’, wage set by the newly-
established Industrial Court
and legally enforceable on all employers was closely related to
this goal and this policy
itself in turn to support the need for encouragement of
manufacturing and indeed
protection of those undertaking manufacturing activities.)
There was also a hint of an ‘economic’ argument – based on an
awareness of the fact that
the more intensive development of rural-based industries had
inbuilt limitations because
of the decreasing returns to investment in them, investment
which would necessarily
(because the resource land was fixed) be applied to
progressively less productive land. By
contrast investment in manufacturing industry – at least once a
certain stage had been
passed – showed the potential for increasing returns – that is the
more investment, the

more productive it is likely to become. The argument came to be
enshrined in the infant
industry argument (though possibly more as an ex post facto
rationalisation of policy
rather than a key basis for it).
And finally – and perhaps most decisively (although it is
difficult to quantify and assess
the importance of this factor) – there was also an element of
pride associated with the
10
ability to manufacture things rather than simply rely on
exploiting natural resources. This
led to a significance being attached to the development of
manufacturing as a goal purely
and simply in its own right.
Whatever the relative importance of these factors they led to a
resolve on the part of
Australian governments to give encouragement and assistance to
those undertaking the
further development of manufacturing.

The development of the manufacturing sector during the 1920s
(and the investment
activity associated with it) was substantial. While it probably
added little to economic
growth (as we have defined it) an important platform was laid
for developments in the
following decade, the significance of which will be examined in
the next topic.
‘THE AUSTRALIAN SETTLEMENT’
This term (popularised only towards the end of the twentieth
century) refers to a network of concepts and policies about
which there was a general consensus among policy makers and
which, together, underpin the development of Australia as a
nation (including its economic development). (It is important to
understand that this was not a ‘Settlement’ in any formal or
legal sense, but rather a set of ideas that underpinned the
evolution of Australia as a social and economic entity.)
Accounts of the different strands that made up ‘The Australian
Settlement’ vary, as do the relative significance of different
strands. However, it is widely accepted that prominent, perhaps
foremost, among these were policies that related to economic
activity. In these the common thread is the notion of achieving
goals that differed to those that would arise from unregulated
economic activity (what in more modern-day parlance would be
described as ‘free markets’). The common theme was the

‘protection’ of participants from undesirable consequences of
unregulated economic behaviour.
One of (if not the) most influential of the set of ideas that made
up ‘The Australian Settlement’ was that of trade protection.
This policy would enable the development of a domestic
manufacturing industry, in this way allowing the development
of a more broadly-based economy and freeing the people from
being (as the Australian prime minister for much of the 1920s
was fond of expressing it) ‘mere hewers of wood and drawers of
water’ (or, as some saw it, just rural peasants of the British
Empire, producing the land-based products necessary to allow
the homeland to further its process of industrialisation).
The principal mechanism of the policy of trade protection was
the tariff, a tax on imports (nearly all of which were
manufactured goods). The tariff served to make imports
relatively more expensive and thus encourage the development
of Australian manufacturing industry.
The scope and extent of tariffs was greatly expanded during the
decade of the 1920s (although the origins of the policy can be
traced back to before WWI) and then, in the context of the
Depression in the early 1930s.
The policy (although as noted in the Topic Notes it was in some
ways paradoxical in so far as an attempt to develop a more
broadly based economy conflicted with the view of Australia’s
‘place’ in the British Empire) was to underpin, indeed be the
key element in, Australian economic history for several decades
until it was abandoned in the 1980s.

1 ECON3600 3. 1890 – 1929 NEW EXPANSION AND THE .docx

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