Australia was affected badly during the period of the Great Depression of the 1930s. The Depression began with the Wall Street crash of 1929 and rapidly spread worldwide. As in other nations, Australia had years of high unemployment, poverty, low profits, deflation, plunging incomes, and lost opportunities for economic growth and personal advancement. Australian finance had long relied on foreign investment and borrowing on the London banks; that window closed. Government policies were ineffective, and recovery came when the rest of the world recovered.Joan Beaumont , Australia's Great Depression: How a nation shattered by the Great War survived the worst economic crisis (2022).
The Australian economy rested upon its place as a primary producer within the British Empire. Australia's vital export industries crashed. The price for wool and wheat fell in half, dragging down the entire national economy. Unemployment soared to a record high of around 30% in 1932. and gross domestic product declined by 10% between 1929 and 1931.
There were a few small incidents of civil unrest, particularly in Sydney. Australian Communist and far right movements were active in the Depression, but they remained on the periphery of Australian politics. They failed to achieve the power shifts obtained in Europe, as the democratic political system of the young Australian Federation survived.
The Scullin Ministry of the Australian Labor Party under James Scullin had just assumed power on 22 October thanks to success in the 1929 federal election. Three days later, "Black Thursday" would mark the start of the Wall Street crash of 1929 and the global onset of the Great Depression. The government was overwhelmed. Labor Party began to split apart. Treasurer Ted Theodore failed to implement his Keynesian inflationary plans. New South Wales Premier Jack Lang lost office over his plans to boost the budget through a temporary cessation of interest repayments. Labor defector Joseph Lyons helped shut down the Nationalist Party of Australia and form the new United Australia Party. He ousted Scullin and was Prime Minister of Australia from the 1931 federal election until his death in 1939.
Thus Australia, unlike the United States, did not embark on a significant Keynesian program of massive spending to recover from the Depression. Nevertheless, the Australian recovery began around 1932. Australians took consolation from sporting achievements through the Depression, with cricketer Don Bradman and race horse Phar Lap achieving long-lasting fame.
1920s: The calm before the storm The Great War (World War I) had depleted Britain's savings and foreign investments, and wartime inflation had deeply upset the United Kingdom's terms of trade. A sluggish economy in Britain naturally reduced British demand for imports from Australia throughout the 1920s and this had affected Australia's balance of payments. Throughout the 1920s the Australian unemployment rate floated between 6% and 11%.
The Great War had also caused many necessary infrastructure projects to be delayed or abandoned, many of which began in the 1920s, including the Sydney Harbour Bridge and Sydney's underground railway system in addition to the Commonwealth government beginning to fund major highways. New dams and grain elevators were built, and the rural railway network was expanded in nearly every state. Large sums of government money were made available to provide returned First World War servicemen with farmland and agricultural equipment under soldier settlement schemes.
All these publicly funded projects were paid for by loans raised by both state and federal governments. Most of these loans were raised on capital markets in the City of London at an average of £30 million per annum.
1929: The storm erupts In 1910, the federal government introduced a national currency, the Australian pound, which it pegged to the pound sterling. In effect, Australia was on the gold standard through the British peg. In 1914, Britain removed the pound sterling from the gold standard, creating inflation pressures. Britain returned the pound sterling to the gold standard in 1925 at pre-1913 parity, effectively revaluing both currencies significantly and unleashing crushing deflationary pressures and falling export demand. This had the immediate effect of making British and Australian exports far less competitive in non-British markets, and affected Australia's terms of trade.
In 1931, as an emergency measure during the Great Depression, Australia left the gold standard, resulting in a devaluation relative to sterling. A variety of pegs to sterling applied until December 1931, when the government set a rate of £1 Australian = 16 shillings sterling. This was intended to ease entry of Australian goods into the British and other linked markets.
Falling export demand and commodity prices placed massive downward pressures on wages, particularly in industries such as coal mining. Due to falling prices, bosses were unable to pay the wages that workers wanted. The result was a series of strikes in many sectors of the economy in the late 1920s. Coal miners' strikes in the winter of 1929 brought much of the economy to its knees. A riot at a picket line in the Hunter Region mining town of Rothbury saw police shoot one teenage coal miner dead.
The conservative Prime Minister of Australia, Stanley Bruce, wished to dismantle the conciliation and arbitration system of judicially supervised collective bargaining which had been the cornerstone of Australia's industrial relations system since the 1900s, which would allow employers alone to increase or decrease employee wages in response to economic and market conditions.
The opposition Australian Labor Party, led by James Scullin, successfully depicted Stanley Bruce as wanting to destroy Australia's high wages and working conditions in the 1929 federal election. Scullin was elected prime minister in a landslide which saw Stanley Bruce voted out as the member for Flinders, the only time until the 2007 federal election that a sitting prime minister lost his seat.
1929–1935: Scullin and Lang
The James Scullin Labor Government had just assumed power with the commencement of the Scullin Ministry on 22 October following the 1929 federal election, however just a couple of days later, Black Thursday would mark the start of the Wall Street crash of 1929 and the subsequent global onset of the Great Depression. From the outset the Scullin administration was buffeted by the effects of the global economic crisis.
Throughout Scullin's term, commodity prices continued to fall, unemployment rose, and Australia's big cities were depopulated as thousands of unemployed men took to the countryside in search of menial agricultural work. The stagnant economy had reduced economic activity and therefore tax revenues. However, the debt commitments of both state and federal governments remained the same. Australia became severely at risk of defaulting on its foreign debt which had been accumulated during the relative prosperity and infrastructure-building frenzy of the 1920s.
The Great Depression in Australia saw huge levels of unemployment and economic suffering amid plummeting export income. Although the economic downturn was a product of international events, Australian governments grappled with how to respond. Conventional economists said governments should pursue deflationary policies. Radicals proposed inflationary responses and increased government spending. Division emerged within the Labor Party over how to respond.K J Mason; Experience of Natiohood; 3rd Edition; McGraw Hill; 1992.
In August 1930, Scullin invited Sir Otto Niemeyer of the Bank of England to come to Australia to advise on economic policy. Niemeyer met with Federal and State leaders at a conference in Melbourne where he recommended a traditional deflationary response of balanced budgets to combat Australia's high levels of debt and insisted that interest on loans be met. It entailed the balancing of the budget through expenditure and wage cuts, without additional overseas borrowing, necessitating reductions in social welfare programs, defence spending and other sweeping cutbacks. The Premiers and Prime Minister Scullin agreed to this Melbourne Plan, which would go on to form the basis of the Premiers' Plan. Ted Theodore, Treasurer in Scullin's Government, supported an inflationary policy of increased government spending in times of a recession, a view espoused in 1936 by John Maynard Keynes. The Senate and Commonwealth Bank (then also acting as the country's central bank) rejected Theodore's spending plans. The Labor Premier of New South Wales meanwhile announced the Lang Plan in February 1931, which included a temporary cessation of interest repayments on debts to Britain and that interest on all government borrowings be reduced to 3% to free up money for injection into the economy.
In 1929, as an emergency measure, Australia took the Australian pound off the gold standard, resulting in a devaluation relative to sterling. Starting in September 1930, the Australian banks began to slowly devalue the Australian pound, and a year later it had been devalued 30% against the Pound Sterling. This had the economic effect of increasing the cost of imported goods and increasing the cost of servicing government overseas debts, which were denominated in the overseas currency, typically in sterling.
Jack Lang, the Labor Party Leader of the Opposition in New South Wales and a fiery left-wing populist, campaigned vigorously against the provisions of the Melbourne Agreement. He was elected in a landslide in the NSW state election of 1930.
Scullin departed for an Imperial economic conference in London, necessitating an absence of five months, during which time he managed to secure reduced interest payments for Australia. With James Fenton as acting prime minister and Joseph Lyons as acting treasurer in his absence, Labor continued to negotiate Australia's economic response, with Fenton and Lyons advocating a more conservative fiscal approach and the unions and caucus calling for repudiation of debts.
In 1931 at an economic crisis conference in Canberra, Jack Lang issued his own programme for economic recovery. The Lang Plan advocated the repudiation of interest payments to overseas creditors until domestic conditions improved, the abolition of the Gold Standard to be replaced by a Goods Standard where the amount of money in circulation was linked to the amount of goods produced, and the immediate injection of £18 million of new money into the economy in the form of Commonwealth Bank of Australia credit. The Prime Minister and all other state Premiers refused.
With the rejection of the Theodore and Lang inflationary plans, the governments of Australia met to negotiate a compromise in 1931. The resulting Premiers' Plan required the Australian Federal and State governments to cut spending by 20%, including cuts to wages and pensions and was to be accompanied by tax increases, reductions in interest on bank deposits and a 22.5% reduction in the interest the government paid on internal loans.
The policy contrasted with the approach put forward by the British economist John Maynard Keynes and which was pursued by the United States, which held that governments needed to spend their way out of the Depression. The plan was signed by New South Wales Labor Premier Jack Lang, but he was a notable critic of its underlying philosophy and went on to pursue his own policy of defaulting on debt repayments, which led to confrontation with the Federal Scullin and Lyons governments and resulted in the Lang Dismissal Crisis of 1932.