Tuesday, September 17, 2013

The onset of the Great Depression

Armidale Teachers' College

A short  piece I was writing on the building of the Armidale Teachers' College for inclusion in a book to be published in November, caused me to look back at a much earlier piece of writing I did on the start of the Great Depression in Australia.

My objective was to set  the economic back-story, the context, for the story of the building itself.

The contract for the building was let in March 1929, with construction beginning the following month. By the time the new College’s foundation stone was laid on 29 November 1929, Australia was in the grip of recession, although the scale was still not clear. By early 1930, the expected NSW State deficit for 1929-30 had risen to over three million pounds. Despite that, construction was pushed ahead. 

I thought that I might repeat that earlier writing here, for it still has a certain resonance. 

"The causes, and course, of the Depression are complex, but are so inter-related to the political events of the period that it is necessary to have some command of them if we are to understand the political maelstrom that now caught up David Drummond.[i] The changes in Australia's economic structure that we have discussed before continued throughout the twenties; reflecting this, in 1925-26 manufacturing employment exceeded rural for the first time. Industrialisation was associated with, and assisted by, heavy expenditure on public works such as railways, electricity, roads and sewerage. The pattern of industrialisation and public works led to further growth in the metropolitan cities. Between 1921 and 1933 the population of the Australian capital cities rose by 32.9 per cent.[ii] Metropolitan population growth became self-generating, for the need to house rising city populations added thousands more jobs in building and construction.

Economic change was reflected in political change. Just as country interests had organised to try and protect their position, so manufacturing interests also organised.[iii] Through bodies such as the Australian Industries Protection League (established in 1919) they forged links with the Nationalist and Labor parties, pressing for higher tariffs and preaching the message that made in Australia was good for Australia. The manufacturers' drive for higher tariffs was fuelled by their continued vulnerability to import competition. During the twenties productivity within Australian manufacturing grew slowly if at all, so that local manufacturers found their costs rising at a time when import prices were falling. Manufacturers were able to force a series of tariff increases, but import competition continued to increase. Industry responded by trying to control or even cut wages, which in turn led to continuing industrial trouble.

Although some rural interests did support protection, the Country Party had begun as a low tariff party. However, it quickly realized that it could do little in the face of combined Nationalist/Labor support for tariffs.[iv] Page therefore advised primary producers to 'get into the vicious circle themselves by seeking Government support for their activities'.[v] This advice may have been sound politically, but it was a crucial defeat, for tariff protection was a major cause of the shift from country to city that the Party was trying to stop. As the decade passed, rising tariff levels, associated with relative stagnation in rural incomes, led to a resurgence of anti-tariff feeling in country areas. David Drummond shared this feeling, for in May 1927 he wrote to Page suggesting that continuation of high tariffs must lead to disaster via over-capitalisation of secondary industry associated with destruction of primary industry.[vi]

Despite growing public recognition of the longer term economic problems and choices facing Australia, few realised just how vulnerable the Australian economy had become by 1929 to any international downturn. Import competition within the domestic market was increasing. Government public works programs had been funded by heavy overseas borrowings - fifty-two million pounds in 1928 alone[vii] - which meant that a rising proportion of export income had to be used to pay interest and dividends to overseas investors; by 1927-28 such payments had reached 28 per cent of export income.[viii] However, the great bulk of that income still came from a very limited range of primary products.[ix] This mix was a recipe for balance of payments disaster: should overseas borrowing stop, or export prices fall sharply, then the balance of payments was likely to plunge quickly into deficit. External vulnerability was associated with internal weakness. Manufacturing employment depended on domestic incomes which depended on rural incomes and on building and construction. Rural incomes in turn depended on overseas prices, while building and construction depended on overseas funded public works programs.

In 1929 the worst possible combination of events happened. Export prices fell, while overseas borrowings stopped as a consequence of the effective closure of the London capital market to Australia. The balance of payments plunged into a deficit that threatened to exhaust the country's overseas reserves and led the Federal Government into a desperate search for international solvency. Within the domestic economy rural incomes fell while public works programs ground to a halt. Unemployment rose and rose again: the percentage of trade union members unemployed rose from 9.3 per cent at the start of 1929 to 13.1 per cent by the end of the year and then to 23.4 per cent by the end of 1930.[x] Australia's economic problems would have been intractable in any case, but the country was then particularly ill-equipped to deal with them. The sources of professional advice were still very limited, the available economic statistics were so inadequate that it was extremely difficult to discover what was happening within the economy, while the Federal Government had little economic expertise. In these circumstances it is not surprising that governments were slow to appreciate the real extent of the problem. As late as July 1929 the Commonwealth Bank's half-yearly report, while recognising that business activity was below normal, could summarise conditions as 'continued stability.'[xi]

The New South Wales Government was the first to react to the growing economic troubles, for New South Wales proved to be particularly vulnerable. As a major industrial state, it was already affected by growing import competition, while the growth in its metropolitan population, and hence the numbers in building, construction and public services, had been particularly marked; between 1921 and 1933 Sydney contributed some 28 per cent of Australia's total population growth. The State's funding methods added to its vulnerability. All states used London overdraft finance to fund public works expenditure while raising long-term loans. However, New South Wales' dependence on overdraft finance was greater than that of other states. This saved interest payments, but meant that the State's financial position would quickly become critical should the collapse in the London market for long term funds continue for any length of time. In March and April 1929, the State's London overdraft rose to three to four million pounds, but at that stage the Government was not worried, as the closure of the London market was expected to be only temporary. By June the State was in a financial vice which tightened as the year proceeded: not only could New South Wales not raise long-term loans, but the State's bankers were resisting any further increase in overdraft levels. Equally importantly, the State now faced declining income tax collections, rising losses on railway and transport services, and rising welfare costs. By early 1930, the expected State deficit for 1929-30 had risen to over three million pounds."

[i]The economic analysis of this chapter draws heavily from: C.B. Schedvin, Australian and the Great Depression. A Study of Economic Development and Policy in the 1920s and 1930s, Sydney University Press, Sydney, 1970. Supplementary material is drawn from: W.A. Sinclair, The Process of Economic Development in Australia, Cheshire Publishing, Melbourne, 1976; L.F. Giblin, The Growth of a Central Bank. The Development of the Commonwealth Bank of Australia 1924-1945, Melbourne University Press, Carlton, 1951; E.O.G. Shann and D.B. Copland, The Crisis in Australian Finance 1929 to 1931, Angus & Robertson Limited, Sydney, 1931; D. Copland, Australian in the World Crisis 1929-1933, Cambridge University Press, Cambridge, 1934; E.O.G. Shann and D.B. Copland, The Battle of the Plans. Documents Relating to the Premiers' Conference, May 25th to June 11th, 1931, Angus & Robertson Limited, Sydney, 1931.

[ii]Population figures have been calculated from the figures given in Appendix VII, R. Ward, A Nation For a Continent. The History of Australia 1901-1975, Heinemann Educational, Richmond, 1977, pp.446-447.

[iii]See R. White, Inventing Australia. Images and Identity 1688-1980, George Allen & Unwin, Sydney 1981, Chapter 9, p.140ff. The history of the League is summarised in: 'AIDA - The History', Australian Industries Development Association Bulletin No 341., June 1982, pp.7-9.

[iv]For a description of Country Party (and country) attitudes towards the tariff see: U.R. Ellis, A History of the Australian Country Party, Melbourne, University Press, Parkville, 1963, particularly Chapter 9, p.114ff; B.D. Graham, The Formulation of the Australian Country Parties, Australian National University Press, Canberra, 1966, p.118, 229-231, 245-247.

[v]Cited Ellis, The Australian Country Party, p.115.

[vi]Copy in FP.

[vii]Giblin, The Growth of a Central Bank, p.63.

[viii]Schedvin, Australia and the Great Depression, p.73.

[ix]In the last two years of the twenties, 88 per cent of export income came from wool, hides and skins, wheat and flour, dairy produce, meats and metals. D. Clark, 'A Closed Book? The debate on causes', in J. Mackinolty (ed), The Wasted Years? Australia's Great Depression., George Allen & Unwin, Sydney, 1981, pp.10-26, p.23.

[x]These figures are taken from the table in L.J. Louis and I. Turner (eds), The Depression of the 1930s., Cassell Australia, Melbourne, 1968, p.89.

[xi]Cited Giblin, The Growth of a Central Bank, p.64.


Winton Bates said...

Contemporary relevance?
Australian governments have probably learned to borrow for long terms and lock in low interest rates. But suggestions that Australia should be taking advantage of current low interest rates and our low public debt levels to fund a major expansion of public infrastructure investment to replace the mining boom still have to contend with the possiblility that a further decline in tax receipts could result in potential debt servicing problems.

Anonymous said...

And also, if I have my conversions right, the possibility that the Reserve Bank might actually finally succeed in depressing the $A to, what - $US0.80?


Jim Belshaw said...

That's partly it, Winton, but more some other things.

First, in 2013 our export base is pretty much just as narrow as it was in 1928-29. We tend to forget at the height of the GFC, many predicted a dramatic drop in export prices. No one really forecast that Chinese growth would continue in the way it did.

Secondly, just as in 1929, Australia faced a sudden closure of overseas capital markets. In 1929, it was Government that was hit, in the GFC the Australian banks with their dependence on international borrowings.

Then at the time of the GFC we had something very close to an incipient bank run and then major shifts in funds from smaller to bigger financial institutions. Mishandled, that could have fed into European style problems.

One big difference this time was a flexible currency. This provided a buffer when the collapse really hit. A second difference lay in the sophistication of policy responses.

Without China and those responses, it could have got very messy indeed. Europe and especially the EU zone is a salutary lesson. My impression is that in certain countries indicators like unemployment are worse than they were during the Great Depression.

And on the exchange rate, kvd, try 40 cents!

Its interesting, that's all, to play what-if taking previous crashes into account.

Anonymous said...

Hey Winton:

don't worry, be happy!


- supporting your cause :)


Winton Bates said...

Thanks kvd. It is good to see researchers looking at that side of the relationship. I will take a closer look at the study at some stage to see how well it is able to identify direction of causation.

Anonymous said...

"..something very close to an incipient bank run" - if this was ever a real problem it was aggravated by the Government's bank guarantee which engendered a freeze on redemptions from from mortgage funds and the like. So our big banks did very well out of the GFC and are now thriving on much more generous margins, thanks to their increased reliance on domestic savings (at peppercorn rates of interest) to fund their lending.


Jim Belshaw said...

Hi DG. There appear to have been two stages in the potential run. In the first, people pulled their money out of banks including the big four. Then you had the later diversion of savings to the big four.I agree with you that the big banks ended by doing okay out of the GFC. I don't see that as a real problem.