"Life is lived forwards but understood backwards." (Old maxim) "Those who forget the past are doomed to repeat it." (George Santayana) Great Depression of the 1930s Between 1929 and 1932: 4. International trade fell by two-thirds US gross national product fell by 31 percent US industrial shares lost 80 percent of their value US unemployment rose to 24 percent Main themes of lectures Australian counter-cyclical policy was more restrictive than necessary ie. Governments were too obsessed with achieving the impossible - balanced budgets But Australia had little choice but to try and cut her labour and other costs of production, given collapse in terms of trade 1
1930s & now similarities Australia's vulnerability to overseas shocks The foreign debt situation Big debates about who suffers/gains from policies aimed at alleviating the above problems Three vital differences between the two eras though Modern domestic and international banking systems are much more integrated than they were in the 1930s. This makes rescue operations easier. Governments are much more involved in over-seeing and regulating domestic banking systems With such international agencies as the IMF, it is much easier to impose discipline on recalcitrant banks, and even nations. Deflation rather than inflation In the early 1930s, deflation rather than inflation was the norm. Interest rates were dramatically lower and there was much more idle equipment and resources. Stimulation of the economy was thus much easier in these deflated circumstances. Unlike our era it could have been done without setting off dramatic increases in inflation and interest rates. 2
Causes of Australia's Great Depression The Wall Street Crash of late 1929, and the American banking crisis which followed, were not the simple cause of the Great Depression. Their role was to set the spark which set off a time bomb which had been building up over several decades. This great economic time bomb had three, inter-linked, main parts. The first was a growing world over-supply of primary products, relative to the demand for them, which was threatening the continuing prosperity of the primary producing nations and their ability to maintain and expand their imports from the exporters of industrial products. Wheat prices collapsed in inter-war period 350 300 250 200 150 100 50 0 Chicage spot wheat prices, cents US per bushel High/Low Close 1920 1930 1940 1950 Commodity Research Bureau, Commodity Yearbook, Chicago 3
Causes continued The second was great and growing instability in the industrialized economies Rising unemployment and slower export growth had made them especially vulnerable to any further external shocks. Any further serious shocks to trade, capital or exchange rates thus would tip them off their knife-edges. Third was the growing financial instability of the 1920s At the 1919 Versailles Peace Conference, Germany was saddled with enormous reparation payments which they had no way of meeting. J. M.Keynes, showing great prescience, warned that if the revengeful Allies insisted on extracting their full pound of flesh then there would be war in Europe again within twenty-five years. The Germans could only pay in goods but the USA would not accept a huge inflow of German products Thus the Americans raised their tariff barriers and instead lent huge sums to Germany and other debtors. When this flow across the Atlantic stopped, with the Wall Street Crash of late 1929, then the whole monetary system was in deep trouble. 4
World War I sped up the inevitable collapse of this Golden Age of the international economy, and of Britain's premier position within it, in four main ways. Lecture 4: World War II & the "Golden Age" ) ) ) First, it encouraged import replacement in the primary producing economies, which then lowered the potential growth in demand for manufactured exports from the more industrialized nations. Second, it encouraged the further industrial expansion of countries such as Japan and the USA, which in turn increased the competitive tensions which eventually produced World War II. The 1920s thus saw rising trade barriers, as countries tried to export their growing domestic problems and manufacturers and trade unions formed protectionist alliances. Fear of another war also threw up more barriers. Effects of WW1 continued... ) ) ) Third, World War I provided a fillip to primary producers outside of Europe to further increase their output. But the massive loss of life in Europe meant that future growth in demand for this output was not sufficient to maintain stable prices A readjustment in world supply and demand was thus inevitable Effects of WW1 continued... ) Lastly, the War caused great disruption to international monetary arrangements. Britain was now a debtor and her pound much weaker. The prewar Gold Standard, by which in theory at least a country's currency was tied to a certain weight of gold, was in ruins and Britain's attempt to revive it in 1925 proved an abject failure. ) In fact, by returning to it at prewar parity with the $US, which meant an overvaluation of the pound, she did even more damage to her export industries and greatly restricted her ability to pursue more expansionist economic policies.
Australian growth slowed in interwar era 1861-1889 % annual average growth rate 3 1889--1904/5-0.8 1904/5-1913/4 9 1913/4-1919/20-6 1919/20-1929/30 Note poor growth 1 1929/30-1938/9 0.6 1938/9-1945/6 4-3 -2-1 0 1 2 3 4 Data source: Maddock and McLean, The Australian Economy in the Long-Run, Cambridge 198/ABS Reasons: World prices for Australia's key exports - wool and wheat - levelled off then fell sharply in late 1920s. Rise in US output and European recovery from W W I main reasons, why supply growth > demand High immigration and closer settlement meant increased investment on social capital rather than productive Investment less directly productive 1904/5-1908/9 1909/10-1913/14 1919/20-1923/4 1924/5-1928/29 0 0.5 1 5 2 5 3 Ratio of social/productive investment Source: Schedvin, Australia and the Great Depression 5
Reasons: 1920s Australian development also rested on "Men-Money- Markets" ie complementary to UK demands Thus when London capital market collapsed in 1929, so did capital inflow Problem made worse by fact that many longer-run government loans fell due in 1929. Foreign debt servicing (Interest & dividend payments % of exports) 1919-20 1924-25 1928-29 16 20 28 1989-90 1995-96 1998-99 13 11 20.5 0 5 10 15 20 25 30 35 Source: R. Wilson, Capital Imports and the Terms of Trade (1931) Major difference between the 1920s and late 1990s regarding Australias' debt obligations A much higher percentage of total government borrowing was from overseas interests in the earlier era. Only about 20 per cent of the total government debt is now owed to foreigners. In addition, export income as a percentage of GDP is considerably lower. 6
Thus when the time bomb finally exploded Australia had big problems: 4. Collapse in government finance Collapse in rural prices Need to cut wages, given collapse in terms of trade Hence the "Battle of the Plans" over what should be done Export price collapse 100 80 60 Wheat (pence per bushel 40 20 Wool (pence per pound) 0 1918-19 1921-22 1924-25 1928-29 1929-30 1930-31 1931-32 Source: Windett, Australia as Producer and Trader 1920-1932, OUP Unemployment rate differed between states X-Axis Labels NSW Vic Qld SA WA Tas 1925 11 8.6 6.6 4.3 6.1 7.8 1926 7.4 6.4 8.4 5.2 7.1 19 1927 7 7.4 5.9 7.2 5.4 11 1928 13 10.9 7 15 5.2 10.6 1929 15 11 7.1 15.7 9.9 14 1930 27 18.3 10.7 23 19.2 19.1 1931 30.8 25.8 16.2 35 27.3 27.9 1932 35 26.5 18.8 34 29.5 26.4 1933 28.9 23 15.3 29.9 24.8 19.1 1934 24.7 17.4 17 25.6 17.8 17.9 1935 20.6 14 8.7 17.6 14 15.9 1936 15.4 10.7 7.8 10.8 8.1 17 1937 10.9 9 7.3 8.2 5.6 7.3 1938 9.9 8.6 6.4 8.3 5.7 7.9 Data: Schedvin, Australia and the Great Depression NB: Queensland the lowest 7
120 100 80 60 40 20 Unemployment rose sharply in early 1930s 140 Thousands No. unemployed 0 1925 1930 1935 1940 Data: Schedvin, C.B. Australia and the Great Depression % This probaby an understatement because comprehensive data not collected until 1940s Unemployment rate (right axis) 30 25 20 15 10 5 0 Immediate policy reactions "Grow more wheat" campaign - doubled acreage. But price fell further Went off Gold Standard - producing depreciation of Aussie pound against sterling to 125:100 Protective tariff levels increased to try and cut imports Unemployment thus rose sharply Unemployment rates were much, much higher at the height of the Great Depression and unemployment hit a much broader social spectrum of persons, than it has in the 1980s or 1990s In early 1930s in Western countries, rates around 3 times that of our era's recessions and many workers on compulsory "short-time". 8
Australian unemployment high (Peak year level, % ) Germany Australia Canada US UK Japan 7 22 26 25 28 44 0 10 20 30 40 50 Source: Schedvin, Australia & the Great Depression Some Australians actually became better off If you were lucky enough to retain full time employment at the same rate of remuneration, or even at a lower rate, then it was possible - as a result of price falls, falls in rents and other costs - to improve one's real wage. Women hit particularly hard Married women simply laid off by public service, teaching departments etc. Preference given to male "bread-winners" over unmarried females. But far more households were one income ones at this time than today. 9
Social security safety nets also weaker and narrower 4. No dole in Australia in early 1930s Food coupons, handouts and rent moratoria main forms of government assistance Governments provided some public works jobs but also sacked many of their white collar employees Result: many unemployed "went bush" to look for gold, hunt rabbits and camped out as could not afford to stay in cities The Battle of the Plans: two main groups Expansionists supported increased government spending and attempts to increase bank lending and tended to be aligned with the Labor Party and the labour movement. The Battle of the Plans: two main groups Anti-expansionists argued that such policies would only worsen the crisis. Called for reductions in government spending to help balance the Federal and state government budgets and for wage cuts. 10
The expansionists had a "Put Australia First" attitude. They stressed that Australia's overseas commitments should take second place to Australia's needs Their opponents tended to be more concerned with the long run effects of us losing the confidence of overseas lenders. Anti-expansionists Sir Otto Niemeyer sent by Bank of England to advise on how British investors' interests could be protected. Argued Australians were living beyond their means and would have to accept a fall in their living standards, via a wage cut. Interestingly, an editorial in the London Times remarked that it was fortunate that a Federal Labor government was in power, as it would be more able to implement a wage cut than a conservative one. The Niemeyer proposals "Inform your government to pay to the last shilling. When, and only when they have done that can we give them any help. Then they will not ask in vain. London will be generous".(bank of England directors to W.S. Robinson, a prominent businessperson of the time) 11
"Sirotter" argued that a fall in Australia's costs of production, as a result of a cut in wages, would lead to a rise in our exports and a fall in our imports, thereby restoring equilibrium in Australia's balance of payments. It would also greatly reduce the chances of us devaluing Australia's pound against sterling, which he was keen to prevent. (This happened anyway.) The "Big Fella", Jack Lang, NSW Premier and arch critic of Niemeyer But even anti-labor groups thought Niemeyer too simplistic. Professor Douglas Copland compared simple wage cut approach to the circumcision ceremony of the aborigines. Both, he suggested, resulted in unnecessary disorganization and distress. "The religion of Australia is its standard of living" (Lloyd Ross, 1932) Sources of expansionist arguments? A few had read J.M. Keynes' Treatise on Money (1930) But most were "underconsumptionists" ie. Argued that demand inadequacies main cause of crisis. Therefore, a "print more money" approach needed. 12
Case against wage cuts Best expressed by a cartoon of that era: "How could we buy more after a wage cut, when we can't afford to buy what is already in the shops". Professor R.F. Irvine, the defrocked first Professor of Economics at the University of Sydney led the intellectual campaign against wage cuts. He had resigned his post in 1922 after allegations of sexual impropriety were made against him Argument for wage cuts The sophisticated acknowledged that demand may well be affected, as wage-earners' purchasing power falls But argued that in the longer-term the fall in costs of production would generate more employment, which would increase demand more than enough to compensate for the initial fall in demand from the money wage cut. 1931 Basic Wage case Cut Federal awards by 10 per cent Introduced an alternative criterion to " need": the capacity of the economy, or more correctly individual industries and employers, to pay. The argument against cutting wages was best expressed by a cartoon of that era: "How could we buy more after a wage cut, when we can't afford to buy what is already in the shops". In 1934, the Arbitration Court restored the 10 per cut 13
When Arbitration Court restored the 1931 cut in 1934, it stressed: It was not it's function "to support or oppose" any "radical reforms in the principles and methods of distributing the products of industry": "This Court is created only to prevent or settle industrial disputes within the meaning of industrial disputes as understood at the time when the Commonwealth Constitution was established". In recent years, attempts have been made to model the Australian economy at this time, notably by Tom Valentine of UWS and Bob Gregory of the ANU. The first concluded that wage cuts were correct but that other policy should not have been so contractionary. The second that real wages did not fall, despite the efforts to achieve that goal. The compromise: the Premiers' Plan Rejected calls for dramatic increases in government spending and for an expansionary monetary policy But did accept the need to reduce non wage incomes by implementing cuts in interest rates. Recovery slow - balance of payments crisis - tariff increases - the imposition of exchange controls and - the wage cuts all played a role in encouraging an increase in manufacturing output which helped to pull us out of the deepest part of the trough. But export prices recovered slowly 14
Main messages of Depression Western economies had to accept a greater role for state intervention. But what was not adequately appreciated, in the heady birth-pangs of the Keynesian Revolution, was that this unavoidable increase in state involvement would favour some groups at the expense of others. And that Keynes was not offering a solution for all economic downturns at all times 4. In sum: Australia had no choice but to try and restrain wage costs - although it appears real wages did not fall for most workers Governments too obsessed with balancing Budgets - had no chance! Economic policy has to take into account political realities - hence the compromise Premiers Plan. ie economic policy in the real world is far more interesting than simply applying textbook models 4. 1930s & now: big differences International banking system a finer spider web - means effects of collapses don't bring down whole system. But hedge funds and Japanese bank debt a big worry Much greater international co-operation - e.g.. IMF - and co-ordination of national economic policies Unlikely to see a resort to "beggar-my-neighbour" trade policies and return to fixed exchange rates and barriers to capital flows. Monetary and fiscal policy responses to downturn much more sophisticated than early 1930s 15
In the words of Keynes "The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty." 16