Register Now!

Search Skwirk

The Commonwealth Government's Response to the Depression

Unit Home Topic Home 3 Pictures 1 Animations 0 Videos Chapter Summary 0 Activities
0 Exams

Introduction

The people of Australia were told that the Depression was simply a fall in economic activity which was a part of the trade cycle of a capitalist economy and that it would soon be followed by a period of boom. Until then, they simply had to wait it out. For those who were without food, shelter and a job, this was not a satisfactory response and they demanded someone provide solutions to relieve the impact. As a result, every government in Australia was replaced between 1929 and 1933, with the electors believing that the nation was already at an all-time low and it was not possible for even the most amateur of political parties to make it any worse. The Depression was a worldwide problem, however, and no one would be able to solve it overnight.

Australia and the Depression

During the 1920s, Australia took advantage of the financially prosperous circumstances of countries such as Britain and the United States by borrowing large sums of money from them. This money was used to develop public infrastructure, with the belief that they could repay the majority of the money through the high export prices which they were receiving for their primary products such as wheat and wool. Prices for Australia's exports, however, began falling on the world market in the latter half of the 1920s due to a fall in the demand for Australian exports. By January 1929, London refused to provide any more loans to Australia.

The world economy was also in decline and in October 1929, panic over the prices of shares on the New York Stock Exchange which had risen to unrealistic levels, resulted in the collapse of the Wall Street stock market. With a collapsed economy, the United States and Britain were forced to call in the repayment of their loans in an attempt to curb the effects of the Depression in their own country. This included the money which they had loaned to Australia, leaving Australians quickly finding themselves struggling in the midst of the Depression.

See animation

Three options to alleviate the Depression in Australia were proposed:

A) Proposed by Edward Granville Theodore, Federal Treasurer, the first plan was considered a daring plan of inflation and was centred on the belief that the government should increase spending to stimulate the economy. They were to do this by putting the budget into debt to create more credit which would in turn create more employment. The Theodore plan, however, was rejected partly out of fear that it would increase prices and partly due to his being forced to resign over accusations of corruption.

It was a plan similar to Theodore's which allowed Germany to become the first nation to escape the worst of the Depression. This is despite the fact that Germany was hit by the full force of the Depression due to the 1919 Treaty of Versailles which required them to pay large sums in reparations and her also being, much like Australia, heavily dependent on foreign trade and foreign capital which was mostly in the form of overseas loans. Yet, by 1936 Adolf Hitler had essentially eliminated unemployment by increasing government spending particularly through the manufacture of machinery and armaments. By beginning to rearm the military (a violation of the 1919 Treaty), in preparation for war, Hitler had managed to pull Germany out of the Depression.

B) The second plan which was known as 'The Lang Plan' (devised by the NSW Premier, Jack Lang), shared elements with Theodore's proposal, arguing that mortgage interest rates be lowered to three percent, the salaries of top public servants be cut and that the State's level of spending be maintained. 'The Lang Plan' also featured a radical policy that interest repayments to the British should be temporarily suspended or even repudiated. Lang proposed that when Australia's economy had recovered, the loans could be re-negotiated, but until then the money which was not being repaid to Britain should be used for unemployment relief and various other social services.

C) The third proposal, the Melbourne Agreement, was essentially a deflationary approach which was based on decreasing government expenditure and increasing taxes in order to balance the budget. This was the arrangement that was made by the Commonwealth Government and most of the State governments, as well as by a number of other countries around the world.

The Commonwealth's Plan - Scullin Government

The Federal Scullin Labor Government had been elected 17 days before the stock market collapsed. The Labor Party which was led by Prime Minister James Scullin immediately came under pressure to try to find a solution for the Depression in Australia. This included addressing the falling government revenue, the increasing unemployment rates, the falling prices for Australia's exports and coming up with a plan which would enable the nation to meet interest repayments on their overseas debt.

See image 1

However, Scullin understood no more than anyone else how to reduce the impact of the Depression and his Federal Government responded in accordance with most other foreign governments, with a policy of deflation. In addition to this, governments all over the world imposed increased tariffs on imports, which led to an even further decrease in trade. Unbeknownst to the governments, this policy would only make the economy worse.

The adoption of such deflationary policies was under the recommendation of Sir Otto Niemeyer, who was regarded as an expert from the Bank of England. He had been invited to Australia to assess the troubled Australian economy. Niemeyer declared that Australia was living beyond her means and strongly believed that deflation was the only way that Australia could cure the Depression. In what some believe as a tactical pressure to restore some money to Britain, he was also a strong advocate for Australia repaying her debts to the British banks.

The Federal Government first accepted these deflationary tactics in a 1930 conference which involved the State premiers and Prime Minister Scullin. It was there that the Federal Government and all State governments decided to follow the Melbourne Agreement. It involved decreasing welfare payments, reducing the basic wage by ten percent and abandoning public works projects - all in an attempt to slash government spending. They also agreed to increase taxation in order to increase revenue.

In May/ June 1931 the deflationary elements of the Melbourne Agreement formed the basis of the Premiers' Plan, which was eventually agreed to be implemented by most State premiers and the Commonwealth Government. It fundamentally focused on financing the interest repayments to the British banks by reducing the spending of the Federal Government and balancing its budget. It involved an increase in federal and State taxation, a 20 percent reduction in all government expenditure, interest on internal government debt to be reduced by 22.5 percent and a reduction in bank interest rates.

Dealing with the Depression- Federal Lyons Government

Since Federation in 1901, the State governments have been entitled to retain a certain level of autonomy. Therefore, even though the Commonwealth and all of the State premiers had settled on the Melbourne Agreement, few of the premiers governed their States in strict accordance with the policies while there were still discussions over how to implement the strategy. Then when the Premiers' Plan was accepted the following year by the Commonwealth Government, conflict began to emerge between the Federal Labor Government and the NSW Labor Premier Jack Lang, who was strongly opposed to the idea.

This resulted in several splits within a party which was lacking experience and skill, both of which were crucial in this difficult time. Joe Lyons resigned from the Labor party and went on to become the leader of the United Australia Party (UAP), which largely comprised the former Nationalist Party. An early election ensued, in which Lyons became the new Prime Minister of Australia (January 1932-April 1939).

See image 2

Whilst Lyons was Prime Minister, the State Governor of NSW dismissed Premier Lang who defaulted on the State's loans to Britain, refrained from reducing government spending and withdrew the State's money from the bank so that it could not be seized by the Commonwealth. (For more detail refer to Chapter 1: The dismissal of Jack Lang)

Even without the controversy which followed Lang, the Depression was not over and Lyons' position remained a difficult one. As Prime Minister, Lyons had to ensure that the actions of the federal government were in the best interest of all of the States of the Commonwealth, particularly the less populous ones. This was especially significant in the case of South Australia. It had the highest percentage of Trade Unionists unemployed out of all the States of Australia during the Depression, not to mention how the notoriously arid State had been suffering from the drought and the decline in world agricultural prices towards the end of the 1920s.

In 1933 the Commonwealth Grants Commission was established by the Lyons Government. It essentially formalised the Commonwealth practice of using taxes from wealthier States to provide a sense of economic equality across all of the States of Australia. Recommendations for grants to Western Australia (which had been recently denied withdrawal from the Federation of Australia), South Australia and Tasmania soon followed in an attempt to bring their budgets to be equivalent to the average budgets of the other States.

The Commonwealth's Response to Unemployment

When the Great Depression hit the shores of Australia, the nation was without a federal program which could assist the unemployed. Initially, many people had to rely on charities for financial aid and a few other private organisations for food and various other commodities. Public works programs were also favoured by the States as a means to relieve unemployment; however they were usually funded by overseas loans which had begun to be refused.

In 1929 the Federal Scullin Government expressed its belief that the welfare of the unemployed was the responsibility of the States. They did, however, provide some relief for the unemployed by allocating 1 000 000 in funds, which were originally intended for the improvement of roads. But this was only the beginning of the Great Depression. Unemployment rates soared in the years which followed and soon the Commonwealth Government found itself having to provide another 1 000 000 in July 1930 and 500 000 in December, for States to be able to generate employment from the construction of public works. This money was given under a number of conditions which included that the public works had to be profitable enough to enable the State to repay interest on their loans.

See image 3

While the Australian economy was much slower to improve than other nations with advanced economies, it eventually did. It was partially attributed to award wages being cut by 10 percent over time, the improving British economy and the devaluation of the Australian pound.


Chapters:

ToolBox