By Phil Griffiths, Canberra, Australia. Back to my home page: Australian history: Towards a Marxist analysis
This is the text of a talk given around 1985; and deals primarily with the causes of the Depression of the 1890s, looking at parallels to the 1930s. Some of the material here is a bit out of date, but what the heck.
During the past century, the Australian economy has experienced two periods of extremely severe economic collapse: the depressions of the 1890s and the 1930s.
These crises were quite unlike anything we ourselves have ever experienced. In both depressions there was a decline in gross national product of the order of 30%. This meant mass unemployment of between a third and a half of all workers, widespread misery, hunger and anger.
These periods of crisis are important for us as revolutionaries for it is in periods of crisis that the system reveals its inability to satisfy the basic needs of the mass of the population.
It is in periods of crisis that all the old certainties are brought into doubt, when hundreds of thousands of people begin to turn to desperate solutions, when the ideas of revolutionary socialism can grip the imagination of the masses.
What is it that produced two such extreme crises in this country? What forces, what events, what circumstances?
Is there any prospect of Australia being gripped by these kind of crises in the future? After all, Australia today is still a relatively prosperous place.
Now when you begin to look at the crises of the 1890s and the 1930s, you face tremendous problems. For a start, there is no Marxist account of these crises in Australia. To my knowledge, nothing marxist at all on them, not even a serious magazine article.
So what I want to do today is to give the outline of a marxist explanation of these disasters, starting with the 1890s and then the 1930s. After that, I want to draw out some of the comparisons with the period of recession and stagnation since 1974.
The depression of the 1890s followed the greatest boom in Australia's history. This great boom began with the gold rushes of the 1850s and despite cyclical downturns, continued almost unchecked for forty years.
This was the period in which Australian society as we know it was largely developed. The population rose from around 400,000 to over 3 million. The great cities of Melbourne and Sydney were built along with a large scale infrastructure of railways, roads, and other public services.
This is how one writer described Australia before the great boom:
In 1860, the Australian colonies made up a loosely connected group of
economies. No stable society, no effective social order, no established
pattern of settlement, no sustained utilisation of available new resources,
no definite composition of economic activity or of foreign trade, no substantial
capital equipment and no continuing national capital accumulation had been
achieved.
By contrast, by 1890, a stable national economy based on primary production--and
especially wool--had been developed. Manufacturing industry was growing
rapidly and a powerful ruling class, a stable working class and predictable
political institutions had all been created.
The driving force behind this massive economic expansion, the motor of the boom, was the wool industry. To give you some idea of its importance, for an entire century, until the late 1950s, wool comprised, on average, around 50% of all Australian exports.
As the wool industry in Australia became more and more profitable in the 1860s and 70s, squatters and merchants accumulated significant personal fortunes. But they initially did this with very little outside capital. The potential was clearly there for the pastoral industry to attract large scale investment.
This capital investment was spurred by three seperate forces. Firstly, a wave of democratic struggle erupted throughout NSW against the squatters who had control of the best land. Tens of thousands of immigrants began demanding land to farm. Under this pressure, a series of laws were passed allowing people to select land to buy to live and farm on.
With wool so profitable, the squatters were not about to give up their runs easily. Using both fair means and foul, the squatters kept control of most of their land, but they paid a price. They had to buy large portions of the best bits from the government. And so large scale capital investment was drawn into the industry.
At the same time, the squatters began to realise that they could greatly increase their returns if they improved their runs, put up fences, permanent buildings and shearing sheds, if they used washing sheds rather than rivers to wash the sheep, if they drilled bores and built dams to guarantee their water supply.
All these improvements cost money, but with wool so profitable, a whole financial industry was established to service the pastoralists.
Finally, large-scale capital became available to the pastoral industry from the mid-1870s onwards. Much of this capital came from Britain, and it came as a direct result of the so-called Great Depression which began in 1873.
The depression and stagnation in Europe and America due to falling profit rates meant there were large amounts of capital sloshing around the system, looking for a profitable outlet. The Australian pastoral industry was one such outlet. Indeed, there was one period when half of all the savings in Britain were being exported, and half of these capital exports were coming to Australia.
This was the period Lenin described in his pamphlet on imperialism.
So let's just have a look at the kind of economy that was being developed here. It was based on the export of a single commodity, wool, to the industrialised centres of the world, mainly Britain. So it was totally dependent on the world market.
Much of the capital came from Britain also, and, not surprisingly, a
lot of the labour was also coming from Britain and Ireland as people desperately
escape the povery and misery there.
So it's not as if there was some Australian economy that was being taken
over by the British, or any other such rubbish. The Australian economy,
in its crucial, formative, period was entirely a creature, entirely a creation
of European, mainly British, capitalism.
Just to give you some idea of the scale of capital imports: in the final phase of the boom, in the late 1880s, over 20 million pounds a year was being brought in: over 10% of Gross National Product...It would be like capital imports of over $30 billion a year today.
The physical scale of investment was just as grand; in the decade 1870 to 1880, in NSW alone, just one state, the pastoralists put up three quarters of a million miles of fencing. Three quarters of a million miles. That's like putting a fence right around the equator--thirty times. And then, in the following decade, they put up a further million miles. This is in NSW alone: it doesn't include Queensland or Victoria! They used half a million miles of timber--enough to go to the moon and back!
The pastoral industry didn't just exist on its own: its development stimulated the rest of the economy; manufacturing industry for instance, which had to produce all kinds of materials and tools, transport equipment, building materials, repair facilities and so on for the industry.
The pastoral industry stimulated the large-scale development of railways, the banking system, towns and cities, large-scale ports and so on. And in this expanding economy, there was a permanently growing demand for food, clothing, housing and all the goods and services people need. And this in turn stimulated further economic growth in all sections of industry.
Finally, and most importantly, the local ruling class in Australia used the profitability of the wool industry to begin to build a modern nation which they would control.
They did not wait for private enterprise to build up the economy: they intervened directly to get what they wanted: population, industry and a modern infrastructure.
The Queensland and NSW governments spent millions subsidising the fares of immigrants from Britain. All the governments spent enormous sums building railway lines. Indeed, in this period, the various state governments were responsible for some 40% of all capital investment in the colonies.
In other words, in an economy in the midst of a prolonged boom, the governments
themselves kept pace, fuelling the boom further with their own spending,
their own huge investments.
Truly, in some ways, Australia was the original home of state capitalism,
which is no doubt why it earned the title of colonial socialism at the time.
But underpinning it all, was the tremendously profitable and growing
wool industry.
Well, it's no secret that the forty years' boom collapsed in the years 1890
to 1893. Politically, these are the years of some of the greatest class
struggles ever fought in Australia, with shearers, waterside workers, miners
and others fighting bitter defensive battles against the bosses.
So why did the boom collapse? There are, of course, many things which contributed
to the depression, visible things for people to grab hold of.
In Melbourne, a wild, speculative boom in suburban land and housing crashed in the years 1891-3, bringing down more than (?????)half the banks and building societies and leading to a wave of bankruptcies that reached right into the heart of the ruling class.
But whilst this was clearly important, it doesn't explain why a whole national economy was plunged into such a deep and ruinous depression.
Other explanations include the fact that there was a major financial crisis in London in 1890 when the major banking firm of Baring was sent bankrupt as a result of loans made in that other great boom economy, Argentina.
Again, obviously important, but the Australian economy had sailed through previous financial crises and continued to grow. Anyway, British capital still flowed strongly into Australia for a year after the Baring crash.
Then, there was the decline in the price of wool. In the decade 1884-1894 wool fell by nearly half: from 121/4 pence per pound to 61/2 pence per pound. But on its own that doesn't explain the crash--after all the first five years of these falling prices had seen the boom reach its dizzying height.
Anyway, it's not as if the price collapsed in any single year, in 1890, or 1891, or 1892. It was more a case of a gradual decline over the full 10 years.
To explain the 1890s crash we need to turn to a general, Marxist understanding
of the system.
In the final analysis, every recession happens when the capitalists stop
investing, when the bosses lose confidence in their prospects of making
a sufficient profit from future investment.
And when the bosses stop investing, all those industries that supply investment goods immediate feel the effects and feel them hard. From the capital goods sector of the economy, the recession, or depression flows to the rest of the economy, and deepens the original downturn.
We can see that very clearly when we look at the crash of the 1890s. Capital formation at the height of the boom reached over 34 million pounds in 1888. It was still 32 million pounds in 1891, but it collapsed to 16 million in 1892 and 9 million in 1893.
The figures for capital imports are even more spectacular, with capital imports of 20 million pounds in 1888, down to 15 million in 1891 and then 71/2 million in 1892 and just 1 million in 1893.
Here is the root of the depression--a major collapse of 70% in new investment by both local and foreign capitalists in just two years; and a collapse of over 90% in foreign investment.
Now a collapse like this can be triggered off by all kinds of things, and the collapse of the speculative land boom in Melbourne obviously played a major role in precipitating the depression.
But it can't have been the cause of the depression. The collapse of the land boom could only lead to a collapse in all new investment if the underlying rate of profit in the rest of the economy was already under a lot of pressure.
So to find the root causes of the 1890s depression, we have to find what it was that was forcing the rate of profit down in the economy as a whole over a period of years.
To find the cause of the falling rate of profit within the Australian economy I intend to look at just two areas: the wool industry and the railways, however these were large enough and typical enough to give you a feel for what happened.
There were many factors leading to falling profits from wool. Firstly, the wool boom encouraged pastoralists to extend their operations further and further inland, onto drier, more distant pastures (so to speak).
Raising wool in inland Queensland, or back of Bourke in NSW was obviously going to involve much higher capital expenditure in things like dams and bores than in the areas initially settled. Everything on the property, from fencing to shears was going to be more expensive because of the costs of getting everything to these remote places.
Likewise, the cost of getting the wool out was going to be higher. Finally, the value of wool grown on these extensive marginal areas would also be much lower. Nevertheless, the prolonged boom in the wool industry led many capitalists to believe that despite these problems, there was still a profit to be made by setting up sheep runs on them.
So the first problem was the extensive settlement of marginal areas involving lower returns on much higher capital costs.
Then, the Australian industry massively increased wool production and wool exports, which rose over 50% in the decade leading up to 1892. The price of wool fell partly because of this massive increase in supply: remember Australia provided half of Britain's and more than half of Europe's raw wool.
When you put these two things together you are left with the inescapable conclusion that most of the pastoral properties set up in the last years of the boom contributed nothing to the income of the industry. All the millions spent on setting these farms up was wasted.
lect That shouldn't surprise us: part of Marx's analysis of crisis was the idea that the crisis and the collapse in profit rates refthe overproduction of capital.
So there was a massive overproduction of capital in the wool industry. Why? Partly because of the long history of booming conditions and boom profits, stretching over decades. Partly because of the large delay between decisions to invest, and the production that flows from those investments.
And partly because the capitalists of England were desperate for somewhere profitable to invest, given the stagnant conditions in England itself. And there was no shortage of finance companies, banks and so on willing to make extravagant claims about the profits to be made in Australia.
But if there was overproduction of capital in the wool industry, it was far worse in the railways.
By 1890, the various colonial governments had run up debts of 160 million pounds, almost as much as the Gross National Product, and much of this was borrowed to build 12,800 miles of railway.
The railways were undoubtedly important in assisting the spread of towns and sheep stations to the inland areas of the country. But there was no way that the wool industry, or any other for that matter, could justify such incredible outlays.
The end result was a massive foreign debt, with over 40% of exports committed to meeting interest payments. This was equivalent to some 9% of Gross National Product, a horrendous proportion.
Such massive public borrowing and spending could not go on indefinitely. By 1890, the various colonial governments were already winding down their massive spending on infrastructure, and the financial crisis that started in 1891 and hit with full force in 1893 accelerated the process.
The sheer scale of government investment, of public works, meant that if this activity was wound down, even if it was just partly wound down, it would lead to a massive economic contraction, to massive levels of unemployment. But within the logic of the capitalist system, the various governments found they had little choice.
As well as the wool industry, there had been an enormous overproduction of capital in railways. And again, it is easy to see why. Governments are not as subject to the discipline of the market place as private capitalists. They can continue with unprofitable projects for much longer than private capitalists both because they can raise taxes to cover the shortfall, and because they generally find it easier to borrow.
The ease with which governments can waste capital lends itself to political corruption, to politicians fighting for railways and damsand other government facilities in their electorate in an attempt to buy votes to get re-elected. There was plenty of this in the 1880s as completely stupid, uneconomic railways were built.
But if government spending can escape the logic of the market for a long time, it can't escape it forever. Sooner or later the investments have to produce a surplus, or the investments represent so much wasted capital and the interest payments have to come out of increased taxes, out of workers wages and bosses' profits.
The real problem, however, comes more suddenly. The simple act of winding down government spending meant large-scale unemployment as the tens and even hundreds of thousands of workers who owed their jobs to government projects were put off.
Now with that analysis behind us, we can add the international aspect. In 1890, the Great Depression internationally entered its final trough. In Europe, Britain and the US there was a new plunge into recession, and a financial crisis in London as well.
For the previous 17 years, the crisis in Europe had actually helped the
Australian economy; freeing up the capital and labour that were used to
develop the economy in an astonishing boom.
But a lot of that capital was wasted, profits were savagely squeezed and
a recession was on the cards whatever happened overseas. The new international
recession added enough to bring the Australian economy to its knees.
With massively increased production, wool prices were bound to fall anyway. The overseas recession guaranteed a fall in demand that meant they would fall faster and further.
With profit rates already squeezed, the falling prices for wool waged havoc on the pastoral industry, and fuelled the financial crisis. The financial crisis in Britain made investors wary of Australian loans and this added to problems here.
I think a good parallel for the situation in Australia is probably to
look at countries like Poland or South Korea, who managed to grow very fast
in the first period of the latest world crisis.
Poland borrowed billions to build its industry up, and the western banks
were only too eager to lend. In the end, most of the capital was wasted,
and this precipitated the crisis of 1980, that saw the rise of Solidarity.
South Korea has continued to expand, but it too will sooner or later
face the problem of the world crisis, reduced demand for its products and
then it, too, could face a terrible crash.
And in all this, the role of the Australian government was crucial. Without
its large scale investment, the boom would have been shallower, and so would
the depression. It was a classic illustration that state capitalism is still
capitalism; still governed by the laws of the system.
And to the extent that governments can avoid the laws of the system in the short term; in the long term, they are just building up problems of an even more spectacular nature.
I now want to turn to the depression of the 1930s. This is much more clearly a direct product of the collapse in the world economy of the time.
For a start, in 1929 wool prices fell disastrously, followed by wheat prices in 1930. These two commodities dominated Australia's exports and as a result, total export income fell by a third in these two years.
Whatever else happened, this was going to cause a major economic crisis on its own.
Added to this, Australian manufacturing which had become a major element in the economy, was in severe difficulties right through the late 1920s. The growing crisis in manufacturing in the world economy reflected itself in the prices for manufactured imports falling by 24% through the decade whilst the prices of local goods rose 5%.
So the problems of the world market, in both primary products and manufactured goods, were directly imported into Australia in the late 1920s, leading to a virtual collapse in private capital investment: a good indication that depression is on the way.
But once again, as in the 1890s, the Government played a major role in
the economic collapse.
Government capital investment was even more important in the 1920s than
it had been in the Great Boom of 1860-90. State and Federal governments
were responsible for over 50% of all fixed capital investment.
Railways took about 38% of their capital investment, whilst water, sewerage, telephone and telegraphs took 36%. The funds for most of these projects were borrowed, and most of the borrowings took place overseas.
Rather than produce profits, most of these investments lost money and the money borrowed for them had to be repaid from taxation. In the case of overseas borrowings, the funds to repay these borrowings had to come from exports.
But in the late 1920s, the Australian economy was suddenly squeezed in two directions. On the one hand, the massive and rising government debt was causing great concern--the reality is that the governments were borrowing new funds simply to pay interest on their old borrowings. Interest payments alone had again reached the level of 40% of export earnings.
Even without a collapse in the world economy, this growth in foreign debt had to stop, and when it stopped, it was inevitably going to cause a crisis of its own, simply because it represented such a large proportion of the national economy.
In fact, government public works had already started to decline, and this was already adding to the rising level of unemployment.
The great crash bought both these problems together. The British banks were unwilling to raise further capital for Australian governments and used their powerful position to help dictate economic policy in conjunction with the Australian banks.
This virtually ended government public works for a whole period. In the
short term, around 1930-31, some 200,000 workers were thrown out of work
directly because of cuts in government spending, at a time when the population
was way less than half today's figure.
The fundamental cause of the depression in Australia was, of course, the
crisis in the world economy. But it's not as if we poor Australians were
helpless victims of the overseas crash.
Australian capitalism was a full part of a world system that had run out of steam. For example: the fall in wheat prices was largely caused by a massive increase in wheat production, without there being a corresponding increase in the ability of people to buy the wheat.
This increase in wheat production was centred on three countries: Australia, Canada and Argentina. In other words, it was, in large part, expansion of food production in Australia that brought food prices down, forcing down the rate of profit in both Australia and contributing to the falling rate of profit in the world economy as a whole.
But again, there were particular aspects of Australian capitalism that influenced the form of the crisis here, and its severity.
Once again, massive amounts of capital had been invested by the government with no serious prospect of short term return. Indeed, despite a massive level of investment, the various railway systems lost huge amounts of money.
Just to give you some indication of this: by the 1920s, the Victorian Railways Commissioners could boast that "all areas of the state--excepting the mountainous north-eastern region--were within 8 miles of a railway".
They built railways to places you've never heard of. None of these railways had any hope in hell of producing a return in the short term.
Again, as in the 1880s, the governments could get away with defying the laws of the market for a prolonged period, but in the end, the bills would have to be paid, and the law of value would reassert itself.
Added to this, the sheer scale of government investment in the 1920s meant that the scale of the depression, when it came, was that much greater.
An indication of this can be seen by looking at how different sections of the economy were affected. Despite the collapse in wool and wheat prices, there were relatively few jobs lost directly in those industries.
Instead, the main job losses were in construction and metals and machine manufacturing, the industries supplying capital goods throughout the economy--to the farmers and the government alike.
In building and construction, employment fell 7% in 1928/9, another 21% in 1929/30 and another 28% in 1930/31. In metals and machine manufacturing, employment fell 10% in 1929-30, 23% in 1929/30 and another 8% the following year.
I now want to draw together some of the similarities and some of the differences between the depressions of the 1890s and 1930s.
The depression of the 1890s clearly follows the collapse of an astonishing boom. The boom was a creation of the world market, not only that, a product of a certain stagnation in the British economy, a stagnation that made huge amounts of capital available to the Australian ruling class.
The 1890s collapse was a product of falling profit rates in the country's dominant industry, wool, as well as the effects of large-scale government investment that produced no short term surplus and thus itself represented wasted capital.
Whilst a new recession in the world economy undoubtedly made things worse for the Australian economy, the real problem was that the long period of sluggish growth overseas set limits to the boom in Australia, limits that were inevitably ignored by the capitalists. In this sense, the role of the world economy in the crash was more indirect than in the 1930s.
The other role of the world economy in the crash of 1890 is in the way it created the conditions for the boom in the first place...supplying markets, capital and labour for Australian capitalists to exploit.
The scale of the collapse was a product of the scale of the boom, including the scale of government investment.
The 1930s depression, by contrast, was much more a direct product of the crisis in the world economy. And yet, once again, local factors played a central role in dictating the shape and extent of the crash.
Despite the generally dismal growth of the economy in the 1920s, all Australian governments used every opportunity to borrow money to increase the population and develop a national infrastructure. They were responsible for more than half national investment in the period, investment that was once again, often of extremely dubious value at generating a surplus.
Again, this waste of capital would have meant problems whatever happened. In the event, it simply meant a far greater crash than might otherwise have been the case.
This begs the question: why did governments in both the 1880s and 1920s invest with such gusto? Why were they prepared to take such risks in building up national assets?
That's a question we may well take up in discussion, but I think the answer lies in the nature of Australia as a colonial settler state; consciously allied to, indeed integrated with British imperialism, consciously building the power and influence of British imperialism in the region.
For that, a massive increase in population and an all-round national economic development were necessary. And these were constant and recurring themes in the arguments of all Australian nationalists up until the 1960s.
All this begs the question: can the same thing happen again?
How have things changed since the 1890s or the 1930s?
First and foremost, unlike just about every other economy in the world, the Australian government now plays less of a role in the national economy than it did 50 or 100 years ago. It now accounts for less than 30% of capital formation and more and more, it is attempting to make its investments accord to the fundamental requirement of the marketplace: profitability.
The ruling class is no longer obsessed with the idea of massively increasing the population and national infrastruture at whatever cost.
However, Australia's position in the world economy is still quite vulnerable. The economy is still dependent on foreign capital inflow for economic development. And in terms of foreign markets, its dependence on wool and wheat has been replaced by a dependence on a range of commodities, though coal and iron ore exports are central and these are commodities which are very sensitive to the level of output in heavy industry.
And in the boom and slump cycle of capitalism, it is heavy industry that plays a leading role: booming strongly in a boom, and collapsing in a crash. Up till now, Australia's coal and iron ore exports have ridden upwards on the boom in the Japanese economy. With that boom under pressure, there have been a series of price cuts in these exports.
A serious crisis in Japanese capitalism, especially the Japanese steel industry, could have disastrous consequences for Australia's mining industry, consequences that could be disastrous for the rest of the economy.
In a very real sense, this is a repetition, a limited repetition, of the experience of the late 1880s, when overproduction of wool in a sluggish world economy finally brought the economy down.
We have already had a taste of that with the collapse of the resources boom in 1982, when mining investment largely stopped, unemployment shot up 5% and 100,000 jobs were lost in manufacturing industry.
Likewise, the other major legacy of the resources boom is a massive foreign debt of some $80 billion, most of it incurred by private industry, but a lot also run up by state governments building power stations, railway lines to service the mines and so on.
The high level of foreign debt was one of the reasons that the recent balance of payments crises have had such a profound effect.
That should not be taken to mean that the Australian economy today is a replica of the economy of the past. The situation is much more complex than that.
In some ways, the economy is relatively weaker than in the past. There is no way you can look at Australia and see the potential for any great boom. Australian manufacturing is still relatively weak and small scale, with few markets outside the country. More than that, the ruling class shows no interest in any collective effort to boost its international fortunes, no interest in new, large-scale monopolies or state corporations.
The standard of living in Australia is now well down the list, whereas in the 1880s, workers here almost certainly had the highest standard of living in the world at the time.
But at the same time, the ruling class here is stronger in other ways than it has been in the past.
The population has continued to grow a lot. How many industrialised countries are 130% bigger than they were in 1929? For all its weaknesses, manufacturing is more modern and large scale than it was in the 1920s.
And most interestingly of all, you can now talk of a significant Australian involvement in other advanced countries; significant Australian multinationals like BHP, TNT, Murdoch, Wormald and a string more.
Ironically, though, this large scale investment overseas has the effect of more completely tying Australian capitalism to the fortunes of the world system. A crash in Britain or America will now mean direct losses for a significant section of the Australian ruling class, leading to a direct and immediate crisis here.
We can't predict the future of Australian capitalism in any detailed sense, but we can easily see that the economy remains firmly linked to the world economy and will ultimately rise and fall on the basis of developments in the world economy.
When the next major recession comes, as surely it will, there will be no hiding place for our ruling class.