the australian post-war economy: a study in economic administration

The Australian Post-War Economy: A Study in Economic AdministrationAuthor(s): Douglas CoplandSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 20, No. 4 (Nov., 1954), pp. 421-438Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/138553 .

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THE AUSTRALIAN POST-WAR ECONOMY: A STUDY IN ECONOMIC ADMINISTRATION*

SIR DOUGLAS COPLAND Ottawa

AUSTRALIA emerged from the war with low costs, a high level of London funds, favourable terms of trade, and improved efficiency stimulated by the war effort. All these were substantial assets in the immediate post-war period but there were also certain handicaps, themselves also the product of the war. For one thing the economy was greatly under-capitalized. This was due in part to a low rate of capital formation in the years immediately preceding the war, and secondly to a deliberate policy developed during the war of concentrating entirely upon capital formation that would have a direct bearing on the war effort. Apart from a serious shortage of capital equipment in industry and defects in the transport system, there was a great lag in housing construction. In addition, certain specialized industries had been developed during the war, and it was doubtful whether these could be continued in the post-war circumstances. Then finally there was the heavy task of making a swift and smooth transition from a war economy to a peace economy.

I. THE BASIC ELEMENTS OF POST-WAR ECONOMIC POLICY

In 1946 the Commonwealth Government issued an important White Paper on Employment setting forth as a fundamental objective of policy the maintenance of a high and stable level of employment. This was to be regarded as an article of faith and the most important desideratum of Government action in the post-war period. There was a large body of both expert and popular opinion in favour of this policy and there had been considerable public discussion of it. At this time little if any consideration had been given to the

*This paper was presented at the annual meeting of the Canadian Political Science Association in Winnipeg, June 2, 1954.

It is to a considerable extent based upon a more lengthy treatment of the problem in a paper read before the American Philosophical Society in November, 1953, and published in the Proceedings of the American Philosophical Society, XCVIII, no. 2, April, 1954. I have dealt in more detail with some of the matters relating to Australia's membership of the sterling area in a pamphlet published by Princeton University-Problems of the Sterling Area with Special Reference to Australia (Sept., 1953). I have dealt with a number of problems relating to the lack of balance in the economy in the immediate post-war years, to the wool levy, to currency appreciation and related matters in Expansion and Inflation: Essays on the Australian Economy (Melbourne: Cheshire, 1951). The classic analysis of the working of the Australian economy is to be found in the report of the Committee on the Tariff referred to in the text and published under the title The Australian Tariff: An Economic Enquiry (Melbourne University Press, 1929). As regards the controversy sur- rounding full employment I refer the reader to the Godkin Lectures at Harvard in 1945, published under the title The Road to High Employment (Cambridge, Mass.: Harvard University Press, 1945). The Economic Record, the journal of the Economic Society of Australia and New Zealand, published twice yearly by the Melbourne University Press, has much relevant material on the whole of the period.

Throughout the paper, figures for values have been given in Australian currency. 421

Vol. XX, no. 4, Nov., 1954



The Canadian Journal of Economics and Political Science

problem of immigration, but before the end of 1946 the Government had com- mitted itself to an ambitious immigration programme. The original conception was to take in 70,000 immigrants per annum. This figure was substantially larger, both absolutely and relatively to existing population, than any previous figure since the great gold rushes of the mid-nineteenth century. As it happened the figure was stepped up and in 1949-50 it reached the remarkable level of 190,000. In all, between the years 1947 and 1952 Australia took some 725,000 immigrants. Since the rate of natural increase was also higher than before the war, the total increase in population was at a rate of approximately 2X per cent per annum, which on any standard is a very rapid growth. An additional feature of the increase in population was the commitment Australia entered into to take considerable numbers of displaced persons from Europe immediately after the war, and later by agreement with certain countries, notably Holland, West Germany, and Italy, to take substantial numbers from these countries. This was a new development in immigration policy. Hitherto Australia had been interested primarily in immigrants from the United King- dom, but since the war approximately half the immigrants have come from continental Europe and the proportion is tending to swing more in favour of that area. The "new Australian" is now a familiar ingredient of the Australian population structure and his absorption presented new and interesting problems for the administration as well as for all social institutions in Australia. It was not merely an economic problem but a social and cultural problem of the highest importance. On the whole, it has been solved with considerable satisfaction to both the Government and the new Australians.

The combination of full employment and a high rate of population increase naturally involved a high level of investment and a rapid expansion of the economy. This was all the more important because of the determination of Australia not to allow immigration to threaten the wage level or the standard of living, and because the economy, as already pointed out, was so deficient in basic capital equipment. It was essential, therefore, that capital formation should be developed in the grand manner. As we shall see later, this was done, though not without some difficulties and disturbances to the economy.

Fourthly, the basic decision was made by Australia to adhere to the sterling area which had been emerging in the pre-war difficulties confronted by Eng- land, and had taken definite shape during the war. The fear of a dollar shortage was one of the dominant influences determining Australian policy, but it was not merely a question of the dollar problem; it was also a matter of con- tinuing trading arangements with the United Kingdom which had been built up during the war, and of sustaining the forms of control both internal and external that had been found necessary during the war. Adherence to the sterling area was in a way the line of least resistance, but, on the other hand, it had in the immediate post-war period definite advantages for Australia. There was an assured market in the United Kingdom for certain staple commodities of export, there was an implied guarantee that industry would be able to develop unhindered by a challenge from the dollar area and, in general, there was shelter from the cold blasts of the post-war world economy.

Finally, the pursuit of the welfare state had become a common objective

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Australian Post-War Economy of all Australian governments whether state or federal, whether labour or non- labour. The post-war period witnessed a substantial increase in the provision of social services, in pensions, and in other measures designed to give the common man security from most of the economic hazards that beset him in a semi-capitalistic community.

II. INCONSISTENCIES OF SOCIAL AND ECONOMIC POLICY

There was, moreover, the eternal problem in a federation of defining the respective responsibilities of the federal government on the one hand and the six state governments on the other. Australia had worked out a fairly satisfactory arrangement long before the war for dealing with basic financial policy. This was done through the establishment of the Australian Loan Coun- cil, thanks to an amendment of the Constitution made in 1928. The Loan Council was concerned primarily with the total amount of loans to be raised, with the allocation of the loans among the several governments and with the terms on which loans should be raised. It could not, however, be regarded as an adequate machine for devising basic policy and in particular for planning development at the top level. It should be remembered that in Australia public investment is about 35 per cent of total investment and is, as it were, in the front line. This is due to the fact that a considerable part of the transport, most of the power and fuel supplies, much of the housing, and all of the social capital is developed by governments or by public authorities set up by parlia- ments. Without this framework of public investment, private investment would not be able to achieve its objective. Thus there is no basic conflict between public and private investment except that they might be in competition either for capital supplies or for the supplies of basic commodities required for construction purposes. It follows that the planning of the great capital projects that form the substance of public investment was probably an even more important matter than considerations of the supply of financial capital and the terms on which it could be obtained. To meet this there was set up during the war a National Works Council to be composed of representatives of the states and the Commonwealth. It was intended that this Council should work out a balanced programme of national works that on the one hand would not involve undue strain upon resources during a period of rapid expansion, and on the other would provide employment in a period when a recession in the volume of activity was threatened. Further, there was the important task of allocating the works programme among the several states and the Com- monwealth. This Council, however, did not function in the way suggested. It seemed largely to confine its activities to listing works projects that were thought to be desirable, and, in the event, the state governments competed with one another in building up the largest list. Consequently, the programme of public investment was not in the early post-war years adjusted with any degree of finesse either to the supply of capital available or to the scarce resources of basic capital goods.

Then there was the special position occupied by the Commonwealth Bank which had greatly expanded its functions and its authority during the war. In an important amendment to the Commonwealth Bank Act in 1945 the prac-

423



424 The Canadian Journal of Economics and Political Science

tices developed during the war under regulations were embodied in legisla- tion. In brief, these gave the Treasurer the right to determine basic central

banking policy as developed by the Commonwealth Bank, and they further gave the Commonwealth Bank wide powers over the advances and credit

policies of the trading banks. Thus on the central issue of banking policy the distribution of authority and responsibility among the members of the federation was very unequal-the power resided ultimately in the Commonwealth

Treasury. This is not unusual and it was scarcely to be expected that there could be a dispersion of power. What, however, was required was some method by which adequate discussion of the central features of banking policy could be undertaken either at the Australian Loan Council or at the Premiers' Conference, which has become the leading instrument of consultation between the Commonwealth and the states in the Australian federal structure.

In all the circumstances of the possible conflicts among the several authorities and of basic inconsistencies in the elements of policy, it is surprising that so much was done in the first seven years after the war, and that the economy emerged from a very severe trial with a high degree of efficiency and stability, as well as a considerable measure of confidence that the basic post-war effort had been soundly conceived and effectively executed.

III. CAPITAL FORMATION AND CAPITAL INFLOW

Table I shows the movement in fixed investment and gross national product and gives the percentage of investment to gross product. I have excluded variations in stocks as a part of investment, hence the term "fixed investment." I should explain, however, that it does include the costs of maintenance and depreciation.

TABLE I FIXED INVESTMENT AND GROSS PRODUCT

( ? million)

(a) Fixed investment (b) Gross product (a) as % of (b)

1946-47 269 1,617 17 1947-48 855 2,019 18 1948-49 470 2,267 21 1949-50 666 2,724 24 1950-51 876 3,593 24 1951-52 1,124 3,841 29 1952-53 1,094 4,219 26

This is a high rate of investment on any standards, though on my calcula- tions the Australian proportion of fixed investment to gross product was slightly lower than the Canadian throughout the whole period. Australia has a fairly high level of savings but this would not have been sufficient to support such a large and developing rate of capital formation without a considerable import of capital. After the depression of 1930 onwards Australia had abandoned her traditional policy of overseas public borrowing. Indeed, in the period from 1931 to 1950 it had been the policy to repay debt, and ? 188 million of overseas debt had been paid off. There was, however, a very large net



Australian Post-War Economy

inflow of capital, mostly private capital, in the post-war period. It amounted to a net import of ?670 million between the years 1946 and 1952. Not all of this capital had come in for fixed investment in Australia. Some of it had come because Australia offered more security, and some of it because of a belief that the Australian pound would eventually, and especially in the year of the wool boom, 1950-1, be appreciated in terms of sterling. Whatever might have been the reason, the fact was that this heavy inflow of capital maintained a

highly liquid money market and enabled public borrowing to be undertaken in increasing quantities at rates that were on the whole favourable to the

governments and the public authorities. This was the position until the difficulties associated with the balance of payments crisis of 1950-1 arose. It was not altogether a secure foundation upon which to base a programme of heavy capital formation but for the time being the circumstances were favourable.

The favourable terms of trade that developed after the war contributed

substantially towards this result. I give the figures of the terms of trade for the key period 1946-7 to 1951-2 in Table II.

TABLE II TERMS OF TRADE

(Base: Years 1936-7 to 1938-9 = 100)

Import Export Terms price index price index of trade

1946-47 282 202 87 1948-49 285 333 117 1949-50 309 386 125 1950-51 875 663 177 1951-52 418 467 112

These favourable terms of trade combined with the inflow of capital enabled Australia rapidly to build up its external reserves in sterling. Indeed, during the whole of the intermediate post-war period it was not necessary to

give a thought to the problem of sterling reserves, whereas in the whole of the

pre-war decade this problem plagued both administrators and economic advisers more than any other single problem. From a figure of ?215 million in 1946 reserves had risen to ?452 million in 1949 and to the record figure of ?843 million at June 30, 1951. In pre-war days the desired figure for international reserves was ?80 million, and when it fell below ?60 million it was thought to have reached the danger point. The basic figure would be

substantially higher in the post-war period because of the great increase in

prices and the more disturbed international atmosphere. Thus from 1951 onwards a figure of ?300 million would not be unreasonable as setting the safe limits. There was to be a quick reversal of the position of sterling reserves, a point which will be discussed later. Here it is only necessary to record that by June, 1952, the reserves had fallen to ?362 million. This drop of nearly ?500 million in one year was the most catastrophic change in the position of London funds in the recent history of Australia. By June, 1953, however, the position had recovered and the sterling reserves stood at ?548 million.

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Naturally the change of fortunes in 1951-2 had a marked impact upon both

thought and action with respect to public investment; indeed, one may say that it had a salutary effect. Up to that point, however, it had been possible for Australia to pursue a rapidly expanding capital programme without undue strain on the money market. When, however, one looks at the problem of material supplies for capital construction the situation was far from

satisfactory in the period during which the money market was easy. I have dealt with this problem elsewhere ("The Balance of Production in the Aus- tralian Post-War Economy," Economic Record, Dec., 1949). The basic fact was that the distribution of resources among the industries supplying the basic materials for capital formation was unsatisfactory. There were a number of reasons for this. First, there were the difficulties involved in the transition from war conditions to peace conditions; secondly, there was the very rapid increase in the demand for the basic materials because of the high rate of

capital formation; thirdly, there were certain repercussions from a change in the policy of price control under which controls were relaxed upon the non- essential goods entering into the cost of living or into the construction programme. Naturally in a seller's market resources would tend to flow into industries where control had been relaxed. Whatever be the reason there was a period of four or five years in which one of the greatest weaknesses of the Australian economy was the shortages of these basic materials. I characterized this type of economy as "a milk bar economy" and the appellation seems to have stuck. Fortunately, the circumstances of the period from 1950-1 onwards have for the most part eliminated "the milk bar propensities" of the Australian

economy. An important contribution towards this satisfactory result was made

by the European immigrants who came in under arrangements by which

they were required to undertake two years of directed labour. The policy was to place them in essential industries, particularly in the construction and

export industries. Thus the new developments of the steel works in Woolong- ong, under which the steel production of Australia will be almost doubled, owed a great deal to the employment of immigrant labour.

IV. THE GREAT INFLATION

It will be obvious that the post-war economic policy of Australia would exert strong inflationary pressures on the economy. The pressure of demand

upon resources of all kinds together with the steadily rising export prices inevitably involved an upward movement of all prices and incomes. If we measure the basic inflation by taking the retail prices of all commodities, in-

cluding house rent, entering into the cost of living, we find that Australia

emerged from the war with a cost level of about 25 per cent above the pre- war level. There was a steady rise in prices from 1946 to 1949, and by December of 1949 the index had reached 168, a rise of 68 per cent over the

pre-war level, and of approximately one-third in the post-war years to 1949. This is not altogether a bad result in the circumstances as will be seen in the

comparison in Table III of the price level in a number of countries. I add to the table, however, the price level in the same group of countries for




December, 1952. This brings out the striking change that took place in Australia after the heavy increase in prices associated with the Korean War.

TABLE III RETAIL PRICES

(Base 1937 = 100)

December, 1949 December, 1952

Australia 168 233 New Zealand 146 179 Canada 160 189 United States 164 184 United Kingdom 183 212 West Germany 156 170

It will be seen from Table III that in spite of the strong inflationary pressures inherent in Australian policy, Australia was not in a bad position relative to the other countries in December, 1949. However, the events that followed were to change the picture considerably. Between December, 1949, and December, 1952, the Australian price level rose by nearly 40 per cent. Much controversy developed over the reasons for this great inflation. Some attributed it to the automatic adjustment of wages to changes in the cost of

living, some to the inflationary pressure of immigration, some rather loosely to the condition under which there was "too much money chasing too few

goods," some to the inefficiency of labour, and some to the rise in export prices, and particularly in the price of wool. There isn't sufficient space to dwell

upon all of these contentions, but I think it important to mention one, because of its intrinsic nature and partly because it has now been abandoned as an instrument of basic Australian policy. I refer to the adjustment of wages automatically each quarter to changes in the cost of living. This policy goes back to the First World War, and was steadily extended until in the conditions after the Second World War a very large proportion of wage and

salary earners had their wages automatically adjusted. It will take little analysis to show that such a policy could not be self-perpetuating, that it could not lead to a constant increase in the cost of living and the price level unless there were other forces operating. The fact is that the adjustment did not apply to all elements of wages and salaries, and further that when it was applied it affected only a proportion of total costs in industry. Hence, an

original rise of say 10 per cent would end up with an increase of possibly less than 4 per cent in the general price level. This in turn when applied to wages would again end up with an increase of about 1.5 per cent. Thus in the absence of some other force the original impact of an adjustment of wages to the cost of living would soon be dissipated. In its review of the basic wage in 1953 the Arbitration Court eliminated this adjustment, but did not change either the basic wage itself or the standard hours or other conditions.

I shall not dwell on the other reasons given for the rise in the price level, except to deal with the movement in export prices and particularly in the

price of wool. During the season 1950-1 wool rose to the astronomical figure

427




of 12s. per pound on the average for good and bad wool alike. This yielded an income of ?636 million compared with an income of between ?60 million and ?70 million at the end of the war. The price for 1949-50 had been 5s.

per pound and this was regarded as unduly favourable and had brought an income of approximately ?250 million. The big increase in export income from wool and from other commodities was undoubtedly the strongest in-

flationary force in the post-war Australian economy. This fact would have been clearly recognized by the economists in the twenties and thirties because they placed a great emphasis upon the impact of changes in export income upon the economy as a whole. They regarded changes in the level of export income as initiating forces; other forces, such as rises in prices and costs in protected or sheltered production, could not initiate a general inflationary movement unless some change occurred in the level of export income. Any increases in costs in protected or sheltered production would be spread over the economy and finally rest upon export income. If export income had to meet extra costs, its output would suffer, its net spending power decline, and a deflationary process would be set in motion to offset the rises in prices and costs from other causes. This was the repercussion theory developed by the Australian economists in the late twenties and early thirties and it may be studied in the classic presentation of it in The Australian Tariff: An Economic Enquiry. This was a report prepared for the Prime Minister by a committee of five, namely, J. B. Brigden, D. B. Copland, E. C. Dyason, L. F. Giblin, and C. H. Wickens. Unfortunately, the analysis presented in this book seemed to be in the discard in the thinking and policy-making of the immediate post-war period, but there is little doubt that the prime cause of the great inflation after 1949 was the sudden upsurge in export prices and in export incomes. Up to that time the Australian economy had not shown any marked tendency towards inflation that was greatly different in degree from what was happen- ing in other countries. The great inflation after 1949 was to have important repercussions on the economy, to give rise to great economic controversies, to produce a period of instability, and finally to bring both the economy and the economists out of the wilderness into which they had been plunged by the soft conditions they encountered in the immediate post-war period. There is, of course, great precedent for acquiring virtue in the wilderness and the only doubt that one entertains is whether the period in the wilderness was long enough for acquiring an element of virtue that will endure. I proceed now to examine the conditions that developed in this period of instability and the circumstances under which the economy emerged from these conditions.

V. CONTROVERSY OVER BASIC POLICY

If up to 1950 the problem facing the administrators had been one of check-

ing inflation, there is little doubt that in 1950 it was a matter of urgency to devise measures that would soften the impact on the economy of the big increase in export income. The measures that have been employed in varying degrees in the Western world to promote stability in the economy consist of fiscal policy, credit policy, direct controls, and later a return to a variable rate of interest which might be classified as monetary policy. In some cases,




such as in Canada and Sweden, a deliberate appreciation of the currency was employed at one time to a limited extent. The choice of measures

depends in part upon the nature of the movement that has to be brought under control and in part upon the general social policy of the community. In Australia's case there was a considerable application of fiscal policy, albeit at times concealed. Budget surpluses were placed to special funds such as the National Welfare Fund, or used to meet repayments of debt, or employed for the financing of public works that might legitimately have been charged to loan appropriations. In the period from 1946 to 1949 considerable use was made of fiscal policies in these several ways but the period was one of

buoyancy in the money market, cheap money, and easy credit. There was also a steady increase in export prices and an expansion of export income. These movements, however, were mild compared with what was to follow, and it may be doubted whether much could have been done to check the moderate rises in prices that accompanied the general expansion of the period.

In the middle of 1950, however, the sudden upsurge of export prices brought on by the stockpiling and other changes in world economic policy induced by the Korean War, was soon to have a pronounced effect upon internal prices. The ordinary methods of fiscal policy or dearer money or credit control would certainly have contributed to controlling the situation, but they could only be regarded as being the background in which more drastic measures could be taken. Two courses were open to the Government, namely to appreciate the currency or to impose some form of levy and stabilization fund upon the exports that had benefited most from the increase in prices. Theoretically no doubt it would have been possible to blend the two, but as it happened these two courses were regarded as alternatives and a very vigorous and at times bitter controversy ensued in the discussion over which course should be followed.

The advocates of appreciation took the view that this measure would

dampen down the impact of the higher export prices on export income and

cheapen imports. There is no doubt that this would have been the effect of appreciating the currency, though it may be doubted whether the decline in import prices would have been commensurate with the appreciation of the

currency. This was due to the fact that overseas exporters still enjoyed a seller's market and they would have tended to raise their f.o.b. prices. The critics of appreciation argued that a considerable range of export industries, notably wheat, meat, butter, fruit, sugar, and hides, could not afford the

appreciation of the currency. In some cases these goods were being sold under bulk contracts to the United Kingdom and it would have been necessary to review these contracts and raise the sterling price. Thus part of the cost of appreciation might have fallen upon the British consumer. On the other hand, any feasible appreciation of the currency would have been insufficient to deal with the commodities that benefited most from the rise in prices, namely, wool and metals. In a word, the appreciation of the pound would have fallen on the just and the unjust alike. An additional and more serious but long-term consideration was the fact that the Australian balance of payments in terms

429




of the dollar area was adverse, and very stringent restrictions and import licences had been imposed upon dollar imports. Indeed, these restrictions had been intensified as recently as 1949. It was incongruous to contemplate hardening the currency in terms of dollars at a time when severe restrictions were imposed on dollar imports. This argument appealed to the economists whose roots were deeply embedded in the theories of the pre-Keynsian days. Those who had imbibed the Keynsian faith were not deterred by any such inconsistencies. Hardening the currency might mean more restrictions on im-

ports but that was not in itself to be regarded as a deciding factor. Naturally there were strong groups exerting strong pressure for appreciation of the currency and it would not be difficult to understand why the proposal had a

good press! I stated my objections to the proposal for appreciation at the time (see my

Expansion and Inflation: Essays on the Australian Economy). It was necessary, however, to produce some alternative and this was the plan for an export levy and a stabilization fund. This had three merits. First, it could be selective. It could be applied to those commodities on which the excess demand had created the greatest rise in prices. Secondly, it could be adjusted approximately to the amount of levy required to insulate the excess export income and seriously impede its inflationary pressure. Thirdly, it involved a minimum of control over the economy and did not have the disadvantage of encouraging imports and bringing about a balance of payments problem. This proposal as originally made is also outlined in Expansion and Inflation. It was there

suggested that a levy of one-third of the gross proceeds of wool and metals should be imposed, though the percentage was not to be regarded as in- flexible. The proceeds of the levy were to be non-taxable until such time as

they were distributed in part or in whole to the producers on whom the levy had been made. There was to be a joint board of management of the fund

composed of nominees of the Government and representatives of the producers concerned. In view of the very large increase in export income, it was

suggested that one-third of the proceeds of the levy should be held per- manently in trust as a fund for rural betterment including the amenities of life, education, hospitals, and so on, in country areas. Had this proposal been

adopted, the amount of this fund in one year only would have been not less than ?100 million. The producers would have been taxed only at the level of the incomes they received.

There is little doubt that had this proposal been adopted the rise in export income would not have produced such a violent upsurge in the general level of incomes and of prices. Unfortunately, the wool selling season had already started when the discussion of the proposal reached Cabinet level. The immediate reaction of the growers was one of violent opposition. The groups who favoured appreciation of the currency were also opposed to the measure and in the end the acute differences of opinion at both the political and expert level resulted neither in appreciation of the currency nor in adoption of a stabilization plan. Two mild measures were taken, namely an intensification of credit control through bank advances and the prepayment of income tax

by wool growers through the imposition of a levy of 20 per cent of the gross




proceeds of wool sales. Neither of these measures could bring quick and effective results. The financial structure was far too liquid to permit a credit restriction having much effect and the 20 per cent levy on wool income still left the grower with a wool cheque far beyond his rosiest dreams. It should be added that the grower objected violently to the levy on the ground that he was being discriminated against, in spite of the fact that the majority of

salary earners at all levels had been paying income tax in advance for many years. But as an historian of Australia once remarked of the early squatters- you might as well try to control a Bedouin in the desert as to limit the

operations of the squatter. No doubt it is a good tradition but on this occasion the squatter as well as the community paid dearly for his display of in-

dependence.

VI. THE Debdcle IN THE BALANCE OF PAYMENTS

Needless to say the increased spending power, induced originally by the rise in export income and spreading to other sectors of the economy, was divided in the traditional pattern between locally produced goods and

imported goods. In the year 1950-1 national income increased from ?2,302 million to ?3,126 million. This was a rise of ?824 million or 36 per cent. It was by far the most spectacular increase in money income in the recent

history of Australia, or, for that matter, of most other countries. Naturally, the impact on imports was delayed but it came out in full force in the trade figures for the year 1951-2. The balance of payments was highly buoyant in 1950-1 and the international reserves of Australia rose from ?650 million at

June, 1950, to ?843 million at June, 1951. Meanwhile, two other influences operated to bring about a higher level of

imports. One of these was under the control of Australia and the other was not. The first one was the introduction of a new and plausible means of

checking the inflation. Having failed to stop it at the source, the device was

adopted of deliberately encouraging imports, particularly imports of capital goods, in order to increase the supply of goods against the rising spending power and money supply. If it were true in the simple parlance of the day that inflation was brought about by "too much money chasing too few goods," then it was a natural corollary that if you couldn't stop the money supply, you should try to increase the goods supply. So Australia had the interesting ex-

perience of governments and public authorities being encouraged to make contracts for the purchase overseas of prefabricated houses, earth-moving machinery, tractors, steel, cement, and all kinds of capital equipment. This was to have an interesting sequel in that the troubles that followed in the balance of payments dried up the money supply and imposed checks upon the extravagant plans for public works, so that some of the imported equipment is still at grass. The second source of difficulty arose from exporters abroad finding that their markets were contracting in other places and that the world situation was moving from a seller's to a buyer's market. They proceeded then rapidly to fulfil long-standing orders of Australian importers, some of whom had deliberately in the past adopted the practice of over-

ordering so as to be assured of limited supplies. For these three reasons-

431




expanding spending power, counter-inflationary measures of encouraging imports, and the filling of long-standing orders-the tide of imports soon rose to a flood. In 1948-9 imports had been ?415 million. They had expanded rapidly to the record figure of ?742 million in 1950-1 but in 1951-2 they went to greater heights at ?1,050 million. Meanwhile, export prices had fallen and the value of exports had declined from its record level of ?975 million in 1950-1 to ?675 million in 1951-2. The effect of this was to produce an all-time record deficit in the balance of payments and a decline in our international reserves of ?481 million in one year. It was more spectacular even than the reverses of 1929-30 and 1930-1. No direct action was taken to control this situation until the end of February, 1952, when severe, some- times translated in foreign languages as savage, import restrictions were imposed upon sterling and dollar imports alike. These events uncovered serious errors in calculation as well as mistaken lines of policy. They were to have a salutary effect on the economy, though for a time they produced a situation threatening unemployment and a considerable degree of internal controversy over economic and social policy.

VII. THE PATH TO ECONOMIC VIRTUE

Fortunately certain effective measures had been taken prior to the crisis in the balance of payments. The most important of these was the budget of 1951-2 in which fiscal policy to check inflation was imposed on a scale not hitherto attempted in Australia. The budget became known among the Opposition as "the calamity budget," but in the event it would be more

appropriate to designate it as the salvation budget. The Treasurer aimed at

providing a surplus of ?114 million in addition to allocating over ?100 for Commonwealth public works from revenue. The total revenue was to be ?1,041 million, and if we include the amount allocated to public works as a legitimate part of the surplus, the total surplus would have been ?214 million or more than 20 per cent of revenue. In addition to this the Common- wealth took a strong stand in the Loan Council and insisted on limiting the works programmes of the states to ?225 million, representing a reduction of 25 per cent in the applications of the states for loan expenditure. A second line of attack was made in credit policy and the Commonwealth Bank took strict measures to limit the advances of the trading banks. The Common- wealth Bank was in a strong position to impose its policy on the other banks because of the technique of requiring the trading banks to keep "special accounts" with the Commonwealth Bank. Under this technique the trading banks were required to place to a special account with the Commonwealth Bank an amount equivalent to the increase in deposits above a certain figure. Thus the advances of the trading banks would be limited because increased deposits would not be available for an expansion of advances. The effect of this is shown in Table IV. It will be seen from this table that between 1946-7 and 1950-1 trading bank deposits had expanded from ?636 million to ?1,144 million. In the same period advances had expanded from ?261 million to only ?479 million.

These measures certainly had an anti-inflationary influence, but in the




meanwhile the adverse movement in the balance of payments and the fall in export prices from the high levels of 1950-1 were also operating as powerful deffationary forces. The money market was less liquid, surpluses of goods were accumulating, public investment was less buoyant, and private investment was declining. This is the traditional pattern of economic reaction from an adverse balance of payments. The recession induced by these natural forces operating within the economy was added to by the corrective measures taken by the Government. Naturally those who were opposed to the budget and to the more stringent control of credit either blamed the recession on the Government measures, or criticized these measures because they were taken at a time when the self-correcting mechanism of the balance of payments was producing the necessary deflationary movement. Whether the corrective measures would have been sufficient had not the Government

applied fiscal and credit policy will remain a matter of controversy. My own

judgment is that these measures were necessary and that they had a salutary effect, but one should also add that they did not make the main contribution towards the reversal in the economic tide that ensued about the end of 1952. This reversal was brought about by the adverse movement in the balance of

payments, the decline in export income, the accumulation of inventories, and the increasing tightness of the money market. This is traditional in Australian

experience, but on this occasion the movement was rather more violent. Some

unemployment ensued; thus the total numbers employed, other than in rural and defence occupations, fell from a high point of 2,628,000 in January, 1952, to 2,522,000 a year later. The price of wool had fallen from its high point of 12s. per pound to 7s. per pound while other export commodities in general had eased. The fiscal year 1952-3 opened with uncertainty as to how far these

deflationary forces would go. Meanwhile, the crisis had undoubtedly caused both governments and industry to take stock of the position, and there is little doubt that it had a good effect upon efficiency of both management and labour as well as upon basic thinking about the rate of economic development.

TABLE IV AUSTRALIAN TRADING BANKS

(? million)

Special accounts Deposits Advances

1946-47 265 636 261 1947-48 262 673 810 1948-49 322 776 868 1949-50 377 910 404 1950-51 500 1,144 479 1951-52 466 1,201 621 1952-53 212 1,162 638

VIII. THE BASIS OF RECOVERY

Considering the magnitude of the balance of payments crisis in 1951-2, it was surprising that the recession in economic activity and in employment and the disturbances to the money market were not greater than they turned out

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to be. There were several reasons for the adjustment being made without undue disturbance. In the first place it was possible to ease the credit position. It will be noted from Table IV that the special accounts of the trading banks with the Commonwealth Bank had been allowed to run down from ?466 million in 1951-2 to ?212 million in 1952-3. This gave the trading banks considerable relief and enabled them to finance customers whose inventories were large. The device of the special accounts thus proved an asset in time of difficulty. It will be noted, moreover, that advances which had increased

only modestly up to 1950-1 rose substantially from ?479 million in that year to ?638 million in 1952-3.

In the second place, the device of import restrictions was employed in the grand manner. It was possible to reduce imports substantially and thus to correct the adverse movement in the balance of payments. Imports actually were only ?514 million in 1952-3 compared with ?1,050 million in the previous year. Naturally there was much controversy abroad over the drastic use of import restrictions which were imposed upon sterling and dollar goods alike. Internally the device had the effect of making liquid the large stocks of

imported goods held by importers and maintaining their prices at the high costs of importation. Thus the anti-inflationary device of deliberately in-

creasing imports had the effect in the long run of sustaining the high prices of imported goods. In the end it was not an anti-inflationary device at all. Whilst these steps were being taken to impose severe limitations on imports, both the price level and volume of exports were recovering. The value of

exports actually rose from ?675 million in 1951-2 to ?872 million in 1952-3 and this had the effect of increasing London funds which rose to ?548 million in June, 1953, from ?362 million a year earlier. This was a remarkable recovery and there is little doubt that it imparted a much-needed strength to the banking system and the money market. Whilst the drastic application of import licensing had been a factor in bringing about this favourable change, it was the movement in export prices and in the volume of exports that imparted real strength to the economy. There was an increase in export income which, as we have seen, is the main basic factor determining internal spending power and prosperity. Wool in particular was buoyant at 6s. 8d. per pound in 1952-3 and provided an income of over ?400 million. It has remained strong since and together with other favourable movements in export prices has provided a solid base upon which the economy could resume a high level of activity.

Thirdly, it was possible for the Treasurer to relax some of the fiscal measures he imposed in the budget of 1951-2. Substantial remissions in taxation were made in the budgets of 1952-3 and 1953-4 and it was still possible to provide a surplus in each year, and at the same time to allocate over ?100 million from revenues for public works. The level of both public and private investment had been adjusted to the new situation, and fixed investment was 26 per cent of gross product in 1952-3 compared with the high point of 29 per cent in 1951-2. As the position improved the import restrictions were progressively relaxed but they are not yet completely removed. Wages remained at their high levels but there is little doubt that



Australian Post-War Economy the recession in employment and the decline in spending power during the year 1951-2 had brought about a considerable improvement in general efficiency and a reduction in costs. The economy was indeed in much better shape as a result of the reverse it suffered, and it was fortunate that the buoyancy of export prices enabled the adjustment to be made without serious decline in employment.

A very satisfactory feature of the position was the increase in the volume of export production, as well as the general increase in the output per man- hour in industry. It should not be overlooked that Australia had suffered a severe drought in the early post-war years with heavy losses in both cattle and sheep. By 1952-3 these losses had been made good, and as regards wool, there was an increase in the yield per sheep. With a total volume of wool production of 1,300,000 pounds for 1952-3 the output had risen by nearly 300,000,000 since before the war. This is an increase greater than the total output of wool production for either the United States or South Africa. It is surprising that the market remained so buoyant in the face of increased volume of production. With the sheep population at 123,000,000, the losses of the drought years had been more than made up and the number of sheep was nearly 11 per cent above the pre-war figure. Similarly with cattle, the numbers had risen to 15,250,000 by the middle of 1953, an increase of 18.5 per cent over the pre-war figure. These improvements are due in part to the destruction of rabbits on a large scale and in part to genuine advances in pasture improvement. Thus, as a whole, the rural industries can be regarded at the end of our period in the middle of 1953 as being in better shape than at any time since the war.

Finally, it is necessary to draw attention again to the rate of economic development that marked the whole of the period, despite the setback of 1951-2. Australia has embarked upon the most ambitious immigration policy in its history and also the most ambitious developmental policy. It is true that it looked as though the country had overreached itself in the difficult year of 1951-2, but on reflection it can now be seen as only a slight disturbance that supplied a necessary corrective to loose administration and disordered planning. In the Australian economy, public investment plays a very important part, representing some 35 per cent of total investment. Three main public authorities are concerned with this public investment, namely the Commonwealth government, the six state governments and a number of semi-governmental bodies and municipalities. Obviously, a high level of public investment is essential for economic development and for private investment to perform its allotted function. At the present time some of the public investment is concerned with long-term projects such as the irrigation and hydro-electric power being developed by the Snowy Mountains Authority. These projects may have a long gestation period but in the end they will add substantially to the strength of the economy. Meanwhile they are in part a cost that has to be borne in the present and they justify some measure of overseas borrowing. This, however, is still on a very limited scale, being of the order of $50 million per annum from the International Bank for Reconstruction and Development. Whether this will be sufficient is open to

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certain doubts but for the moment the inflow of private capital has enabled Australia to proceed with a very high rate of economic development without undue strain. It can appropriately be said of the Australian economy that its rate of expansion is almost as high as that of Canada, though it lacks the stability of the Canadian economy. The recent discoveries of uranium and the discovery of oil will have the great advantage of attracting foreign capital though perhaps not of giving immediate returns, particularly in the case of oil. The exploitation of metals has always been an important factor in the idevelopment of the Australian economy. It now seems quite clear that there are large and profitable deposits of uranium which will enable certain areas, hitherto neglected, to be settled. As regards oil, the situation is not so clear but the discovery already made is highly encouraging. With the improvement in the rural industries, the wider spread of natural resources through uranium and oil, and the diversification of secondary industries, notably in engineering, chemicals, and food processing, the basic structure of the Australian economy has been considerably strengthened by the developments during the war and still more in the post-war period.

IX. REVIVAL OF TRADITIONAL POLCY

At the outset I drew attention to the basic elements of Australian economic policy in the immediate post-war years, and to certain inconsistencies among these elements. In some respects the difficulties imposed by the fall in export prices and the balance of payments crisis of 1951-2 have exposed these inconsistencies and thrown into perspective certain extravagances in the Australian policy. I refer in particular to the somewhat confused ideas con- cerning the part that controls should continue to play in the economy after the war, to the conception of full employment as defined by one of its ad- herents as "being more jobs than people to fill the jobs," to the lack of balance between investment and the supply of basic materials for construction, to the desire to maintain sheltered markets in the sterling area, and to the devotion to cheap money at all costs. There has been a change of opinion on most of these matters with the result that Australia is now returning to its traditional economic policy. In particular, the market rate of interest was restored despite protests about the cost of borrowing and the losses incurred by investors in

public loans during the days of cheap money. The attempts to sustain over- full employment as a permanent policy have, in the light of the experiences of 1951-2, been abandoned, though it would be wrong to assume that a high and stable level of employment is not a major objective of Australian policy, as it is of other countries in the Western world. Controls are being relaxed though there is still among the states a touching faith in the virtue of price control. Looking over the whole of the post-war period and bearing in mind the big increase in prices that took place during and after 1950, it is remarkable that so much confidence is still placed in the virtue of price control. More

stringent fiscal and budget policies have been adopted with a view to strengthening the currency and joining other members of the sterling area in a move towards convertibility. A greater appreciation of the importance of outside markets is now current, and it is clear that the sterling area does not offer




all the possibilities of economic expansion required for a vigorous economy like that of Australia or that the area can supply all the capital required to sustain a high rate of national development. Much more attention is being given to improving the volume of production in the export industries and generally to raising the level of productivity. The weaknesses of import restrictions in

encouraging and sustaining uneconomic industries are being exposed and there is some evidence that the administrative practices adopted on tariff matters in the thirties will be restored. More attention is being given to the costs of protection which was such a marked feature of the work of the Tariff Board in the thirties.

Whilst these satisfactory developments are in progress, it should not be overlooked that the Australian economy is still vulnerable at three important points. In the first place, there is the vital importance of export prices, and in particular of the price of wool. The present price of approximately 80d. per pound is highly favourable to the producers and to the economy as a whole. It was perhaps the chief factor in enabling the Australian economy to make the rapid recovery it did in 1952-3 and it now provides the basis upon which the economy can resume its rapid development with a high degree of stability. However, any serious reversal in the prices of leading exports would necessitate a reconsideration of the whole position. If, however, the world economy is to go on expanding, it may be possible for Australia to consolidate her position at the present level of costs and incomes.

Secondly, Australia's membership of the sterling area may not be altogether consistent with her basic economic aspirations. Of all members of the sterling area Australia is developing at the greatest rate and is, therefore, most in need of foreign capital, foreign supplies of certain goods, and markets outside the sterling area. Any move towards convertibility of sterling would obviously be in Australia's interests, and it is not a mere coincidence that at the Finance Ministers' Conference of January, 1952, it was Australia that first put forward proposals designed to lead towards the convertibility of sterling. Fortunately, official policy in the sterling area, together with a generally more favourable economic climate, has made it possible for substantial progress to be made towards the goal of ultimate convertibility. Any reverse in this tendency would, however, necessitate further recourse to economic controls and restrictions by all members of the sterling area, including Australia, and this would not be in the best interests of the expanding economy of Australia.

Thirdly, there is the cost structure of the Australian economy. We have seen that up to December, 1952, the retail price level of Australia had risen by 133

per cent over the pre-war figure. The next highest increase was that of the United Kingdom at 112 per cent, but for Canada, the United States, and other countries the increase was less than 90 per cent. It is not merely that there is this disparity in the movement in costs, but owing to the restrictions inherent in Australian post-war policy and her membership of the sterling area, and in particular the application of the device of import licensing, there are undoubtedly certain high cost industries which may be regarded as uneconomic. Australia had this position during the 1920's. After the Ottawa Conference of 1932 a new tariff policy was adopted, designed to reduce the costs of protection

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and to promote the more economic industries. It may well be necessary for Australia to revert to this policy. It is customary in public discussion of this

problem to exaggerate the effects of high costs and the number and volume of industries which require heavy tariff protection. Until the problem is examined

methodically by such a body as the Tariff Board, we won't know how big it is. A recent estimate by a careful student suggests that import competition would represent "at most a potential threat to say 50,000 employees with a value of production of some ?50m." If this be true the problem would then amount to about 5 per cent of employment and manufacturing production and 15 per cent of total employment and the gross product (this figure is given in an unpublished paper by Mr. H. P. Brown, Reader in Economic Statistics at the Australian National University). From my own observations and those of others who have recently visited Australia, I can only conclude that the

problem is less in magnitude than is commonly supposed. Nevertheless, it will not be easy to handle because of the political repercussions on a government that could be charged with exposing Australian industry to the blasts of foreign competition. Protectionist sentiment has always been high in Australia and the events of the war and the adherence to the sterling area since the war have rather strengthened this sentiment.

The weaknesses to which I have referred are common to most economies of the Australian type; indeed, one might say that they are more pronounced in some of the countries that are in a position not unlike that of Australia. Cer-

tainly, this would be true of the vulnerability of many economies to fluctua- tions in export prices and to the widespread devotion to controls that de-

veloped during and after the war. However, the events of the last three years have witnessed a reversal of the trend towards controls and considerable progress has been made in the direction of freer international financial trans- actions, of promoting multilateral trade, and of preparing the ground for

convertibility of sterling and other currencies into dollars. Australia has much to gain from the encouragement of these trends, and given a favourable climate there is little doubt that the economy is in a sound position to sustain the very high rate of economic expansion which has been the outstanding feature of the post-war period.



the australian post-war economy: a study in economic administration

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