Wealth of the Nation

An extract from J.R. Nethercote’s book ‘Menzies: The Shaping of Modern Australia’ on Australia’s post-WW2 economic recovery. By Henry Ergas and J.J. Pincus.

The post-war Menzies governments presided over creation of a modern Aus- tralian economy, one firmly based on private enterprise, not the nationalisation of finance and industry; one with millions of “little capitalist” home-owners, not renters dependent on the continuous largesse of the state for shelter; one with a greater emphasis on science and university education than on railway work- shops; one no longer held to ransom by communist-controlled unions in coal mining, electricity generation and the wharves; one with its external trade focus shifting from the North Atlantic towards Asia; and one with many of the basic elements of the welfare state.

Yet the successive governments Menzies led (referred to collectively as “the Menzies Government”) secured those achievements largely within the framework of institutions they had inherited and that they entrenched. Respectful rather than subversive of Australian traditions, they relied heavily on the arbitration system to define and implement a wages policy; on tariff protection to promote secondary industry and to assist the more labour-intensive parts of agriculture; and on the Commonwealth’s fiscal strength to underwrite a system of federalism that, over time, weakened the independence and fiscal responsibility of the State governments.

Each of those aspects of policy was an important element in formation and persistence of the political and social coalition that underpinned the Menzies era – a coalition whose bedrock lay in the rapidly expanding urban middle class but which stretched from rural interests through to the conservative trade unionists who formed the Democratic Labor Party. And along with the newly- developed instruments of Keynesian macroeconomic policy, those institutions were also crucial in the way the Menzies Government managed the recurring tension between its central goal of accelerating national development and the constraints the balance of payments imposed on an economy which had a fixed exchange rate but was largely dependent on primary exports and on sustained capital inflows, making it especially vulnerable to external shocks.

In turn, the question of how that tension should be managed was at the heart of the economic policy debates of the time, which largely accepted the desirability (and feasibility) of “fine tuning” – that is, of using monetary and fiscal instruments so as to control short-term fluctuations in the macro-economy – and the intellectual premises on which Australia’s distinctive approach to longer term economic policy relied. Central to those premises was the belief that primary commodities could not in future generate the export income required to fund the level of imports that, without protection, a rapidly expanding economy would demand; the commitment to a wages policy as a way of allocating national income and so helping to absorb shocks to productivity and world prices; and acceptance of the inherent desirability of increasing Australia’s population, which inevitably privileged extensive over intensive growth (that is, an increase in GDP, rather than an increase in per capita income). Although the period was rich in intellectual disputes, they generally involved implementation of policy: the weltanschauung within which the Menzies Government’s economic policy proceeded was very broadly accepted, embodying an almost universally shared consensus.

In some respects, that consensus reflected the spirit of the age, not only in Australia but overseas: in particular, the beginnings of the Keynesian approach to securing and preserving full employment, the use of interventionist measures to guide aggregate supply, and the commitment to providing returned soldiers, the old and the ill with some degree of social security. However, the distinctive feature of the Menzies era – that differentiated it from the stance then adopted by the Australian Labor Party and from the approach pursued in much of Europe and even more so in the developing economies – was that its core beliefs were consciously implemented through policies which relied primarily on stimulating private initiative rather than replacing it, and that were shaped by institutions largely independent of executive government (such as the Arbitration and Conciliation Commission, the Industrial Court (after 1956), the Commonwealth Grants Commission and the Tariff Board).1 The Menzies Government resisted the siren calls of nationalisation on the one hand and of indicative planning on the other: the role of executive government was mainly to facilitate private economic development, rather than plan it, with the most important exception being the active immigration program. And the goals of social welfare policy were largely pursued by an emphasis on job creation rather than through transfers.

In all of those ways, Menzies adopted and adapted the Deakinite legacy to the circumstances of the post-war world in a manner comparable to Canada rather than the United Kingdom or other West European countries.2 But protectionism remained a defining element, vigorously intensified to include import licensing when it proved necessary (but not, as in New Zealand, to be retained virtually indefinitely) and with assistance extended to primary industry, including through “orderly marketing” schemes for agricultural produce: “protection all round” received strong support from the Coalition partner, the Country Party, especially under John McEwen. Protection had multiple economic roles: to create jobs with good wages, thus helping to absorb the inflow of often unskilled migrants; to diversify the economic base; to preserve foreign exchange; and to garner public revenue.

There were, however, two elements of the Deakinite package that were modified almost to the point of abandonment: Imperial Preference and the White Australia policy. Through trade treaties with Britain (1956) and Japan (1957), the Menzies Government adapted international commercial policy to the UK’s relative decline and its turn towards Europe, as well as to the incipient rise of the first of the Asian miracle economies (then specialising in textiles and crockery, not ships and steel). Meanwhile, the Government changed the national composition of immigrants towards Southern Europe, established the Colombo Plan to bring Asian students to Australia (1950), and progressively relaxed the restrictions on non-European settlement, including abolition of the dictation test in 1958. (Through the Migration Act of 1966, the Holt Government established legal equality between British, other European and non-European migrants.)

Before the end of Menzies’ parliamentary career, there were mounting claims that protectionism had caused Australia to slip down the rankings of countries by per capita income; and even the Tariff Board confessed itself unable to offer any convincing economic rationale for the pattern of rates of protection, except differential success in lobbying, or what later was called “rent seeking”.3  In addition, financial repression – that is, tight controls over the price, quantity and allocation of bank credit – seemed increasingly unsustainable in face of the rise of non-bank financial intermediaries that acted as “fringe” suppliers of loans. And the Bretton Woods system of fixed exchange rates was coming under ever-greater pressure, as the United States financed the escalating war in Vietnam on credit and as international capital movements undermined governments’ ability to manage monetary policy without exchange rate flexibility.

Taken as a whole, the period was one of sustained prosperity – prosperity all the more striking for being largely unexpected.  The economic policies of the Menzies Government – including accelerated migration, openness to international capital inflows, the promotion of wage moderation, and a prudent fiscal policy that strictly limited the public sector’s call on national resources, freeing up the savings needed to finance very high levels of private investment

– all helped stimulate that growth and permitted it to persist. And the low tax burden, the steady fall in public debt and the refusal to allow social transfers and entitlements to rise as rapidly as they were rising internationally, all made it easier for Australia to bear the costs imposed by the more profligate governments that followed and, more generally, to manage its way through the years of slower and more volatile growth.

Yet it is also true that the economic policies of the Menzies Government contributed to Australia’s later difficulties, both by promoting the growth of an ultimately uncompetitive manufacturing sector and by strengthening institutions, such as the arbitration system, which could (and, in later years, did) impede the economy’s ability to respond to shocks.

To say that is neither to minimise the achievements nor to denigrate those who called them into being. As we show below, the policies that are now viewed as counterproductive were then almost unanimously endorsed by the country’s leading economists; and, far from repudiating those policies, Labor believed they did not go far enough. Labor’s program promised far-reaching nationalisation, controls over capital inflows and even greater protection. Had Labor prevailed, the adjustment problems Australia faced in the 1970s and 1980s would have been more intractable and even more costly to resolve.

In considering the economic record of the Menzies Government, we begin by examining economic performance during the period; we then review the intellectual premises that underpinned policy; and proceed to discuss how policy was implemented. On that basis, we consider the trade-off that was made between extensive growth – which expanded the economy by increasing its use of factor inputs – and intensive growth, which required making better use of resources (rather than simply using more of them). A concluding section draws together the threads of our argument.

Overview of economic outcomes

In the 1950s and well into the 1960s, Australia, together with much of the Western world, experienced a long economic boom – of steadily advancing living standards, remarkably low unemployment and fulfilled expectations of low inflation – which erased many of the ill effects the traumas of the 1930s Depression and the Second World War had inflicted on the cohorts that experienced them.4 Thanks to that boom, the Australia of 1966 was vastly more prosperous than that of 1950; it was also more equal in terms of the distribution of income and wealth.

And it was far larger also, in economic and social terms. During the Menzies era, the Australian population grew by almost 40 percent, faster than in the world as a whole (34 percent) or the United States (30 percent). This was the height of the post-war “baby boom”: the fertility rate peaked in 1961 at 3.55 – Menzies had introduced child endowment for multiparous families in 1941, in an effort to postpone an increase in the Basic Wage; it was extended to all children in 1950. But even with the “baby boom”, net immigration contributed almost four-tenths of the population increase over the whole period, and over half in the late 1940s and early 1950s – a far higher proportion than in Canada or the United States – as the Menzies Government adapted and extended Labor’s immigration program. Reflecting the impact of migration, there was a doubling in the proportion of Australians born abroad (to more than 18 percent) between the census of 1947 and that of 1966. As the migration program proceeded, the sources of the foreign born population changed too, with “New Australians” increasingly coming from Southern Europe.

At the same time, national production, measured as GDP adjusted for inflation, almost doubled in size: this implies a growth rate twice as fast as that of population, and that had not been experienced for an extended period since the boom that followed the gold rushes.

Given the rapid growth of population and production, it is remarkable that GDP per head, an admittedly imperfect index of living standards, grew at two percent a year: as fast as during the period from 1991 to 2010, which is widely considered to have been a period of great prosperity. (A full discussion of the rise in living standards can be found in chapter 8.)

With the economy growing strongly, unemployment was extraordinarily low in absolute terms – in one month in 1951 (admittedly at the height of the wool boom), the number of registered unemployed in South Australia was down to only three people8 – as well as compared to other high income countries. Despite a slight fall in the participation rate, the supply of labour was increasing rapidly, but demand for labour was also growing fast, boosted by the private and public infrastructure demand of immigrants9 and especially by private non-dwelling capital formation, which rose from 7.4 percent of GDP in 1950 to almost 12 percent of GDP in 1965.

Yet, once Arthur Fadden’s “horror budget” of September 1951 had brought the inflation unleashed by the 1949-50 surge in wool prices under control, low unemployment was accompanied by low inflation, especially in the 1960s (when Australia’s inflation rate was well below that of the other advanced economies).10 In 1953, the Arbitration Commission abandoned automatic quarterly indexation of the basic wage, as being inconsistent with application of the “capacity to pay” principle to an open economy, such as Australia’s.11 In the event, although the metal trades industries became the wage setting leader, and despite the rise in claims for “margins for skill” (and later in the period, in over-award payments, which provided some flexibility in wage setting), there was no serious “wages breakout” until the Whitlam Government came to office. On the contrary, as Blanche d’Alpuget reported, “when the Minister for Labour, Billy MacMahon, travelled abroad, he was lionized by foreign counterparts who wanted to know how Australia managed things so well”.12

Far-reaching changes in the structure of the economy accompanied rapid growth. Over the period to 1965, agriculture declined markedly, shrinking from 24 to nine percent of GDP (Figure 3);13 but rural industries still dominated Australian commodity exports, with wool alone accounting for almost 30 percent of exports by value at the end of the period. The terms of international trade were moving against primary exporters like Australia; moreover, within Australia, the prices of the inputs farmers purchased increased more rapidly than the prices at which they sold their outputs. However, with mechanisation, innovation in varieties and techniques, and application of science, especially of pest control – myxomatosis (although invented much earlier) was introduced in 1950 – productivity in the farm sector was still growing faster than in the non-farm market sector at the end of the era.14

Rapid productivity growth affected relative incomes. Despite a decline in the “product” terms of trade (that is, the ratio of prices farmers received to prices farmers paid), rapid productivity growth in agriculture meant that the “factor” terms of trade – the factors of production Australian farmers had to devote to paying for the factors of production embodied in the goods and services they purchased – did not deteriorate by anywhere nearly as much, and especially when the growth in agricultural productivity was at its peak, may actually have been improving.15 That encouraged agricultural output to expand, which it continued to do even as prices fell. So notable was the resulting growth that a Treasury retrospective, published in 1966, confidently concluded that:

… Despite the fears voiced from time to time about the future of Australia’s exports of primary products, results so far seem to show that increases in production can more than offset the effect on export proceeds of falling prices. Whereas the future of export prices is problematical, experience in Australia and elsewhere suggests that the upward trend in productivity in the main primary industries can continue.16

Even so, the most rapidly growing productive sector was “Other” – services and construction, which rose from 48 to 63 percent of GDP. It was also notable that manufacturing reached its century peak share of 29 percent of GDP in 1958; and that, despite the stirring of a minerals boom at the end of the period, mining barely grew from two percent of GDP. 17

Overall, this was a rare period – only repeated in the 1990s – when strong growth in Australia did not coincide with a sustained increase in world demand for its natural resources, and hence when growth was not led by the resource industries.

Rather, the growth process was largely inward-looking. Although the economy was made more open to the inflow of capital and labour from abroad, high levels of import protection meant that international trade fell in importance. This can be seen from the sharp decline in the degree of (trade) openness, measured by the ratio of exports plus imports to GDP that is shown as line 5 of Table 1 and in Figure 5.

Elsewhere, in the USA, the UK and most advanced economies, openness rose or held steady.18 World trade grew faster than world production, in part due to the efforts of the United States to encourage countries to reduce their import barriers, especially in the various “rounds” of negotiations under the General Agreement on Tariffs and Trade. Australia held back, pleading that it was an intermediate economy: rich but still developing, and reliant on primary rather than manufacturing exports. The refusal of most advanced economies to bind (that is, commit to not increase) the tariff and non-tariff barriers they imposed on agricultural trade, much less reduce them, entrenched Australia’s reluctance to scale back its own protectionist measures. Moreover, Australia preferred bi- lateral to multi-lateral trade agreements, or took unilateral action.19

But it would be dangerous to view openness too narrowly. Although the economy’s trade intensity fell, inflows of factors of production – capital, labour and technology – increased materially, greatly influencing the course of economic development (discussed further below). Additionally, despite the decline in openness to international trade, the economy remained highly vulnerable to external constraints; these manifested themselves in balance of payments crises in 1951-52, 1954-55 and 1955-56, and then 1960-61. Each of those crises, in which the country’s holdings of foreign exchange dropped suddenly, was associated with internal booms that caused a surge in imports. Given the constraint of a fixed exchange rate, governments responded by using monetary and fiscal policy to dampen economic activity; the 1951-52 crisis also led the Government to impose quantitative import restrictions in March 1952 (which remained in place until 1960) as a way of stemming the loss of foreign exchange. Tightening fiscal and monetary policy inflicted a cost in terms of economic growth: GDP shrank by about one percent in response to the 1951 “horror budget” and by two percent in 1960-61, while growth came to a standstill in the downturn that followed the balance of payments crisis of the mid-1950s.20

The result was to highlight the tension between the Government’s central goals of rapid growth and full employment, on the one hand, and the maintenance of external balance – fundamentally, the ability to defend the exchange rate – on the other. How that tension could be resolved was at the heart of economic policy, to which we now turn.

The premises of economic policy

Economic policy during the Menzies era reflected a view of the world that was widely shared by policy-makers and by policy-influencers alike. This was the height of the power of the “Seven Dwarfs”: the mandarins who rose to prominence during the war, but retained their dominating influence on public policy for the following two decades.21 Especially important were Sir Roland Wilson, who was Treasury Secretary from 1951 to 1966, and H.C. “Nugget” Coombs, Governor of the Commonwealth Bank and then of the Reserve Bank from 1949 to 1968; and they were merely the two most prominent public officials with formal training in economics – including, at senior levels, Sir Richard Randall (Treasury), Sir John Crawford (Commerce and Agriculture; Trade) and Sir Leslie Melville (Commonwealth Bank; Tariff Board), along with a growing inflow of economics graduates – who provided government with an analytical capacity that did not exist in the 1930s. This capacity was periodically supplemented by secondments of academic economists, including Trevor Swan (Department of Post-War Reconstruction and, in 1949-50, Chief Economist in Prime Minister’s) and Wilfred Salter (Prime Minister’s, from 1960 to 1962). However, the circle shaping the broad direction of economic policy was broader than that, as the “official family” was attentive to “outside” expert economic opinion, all the more so given the perception, born of the Keynesian revolution and reinforced through the planning of post-war reconstruction, that the tools were being forged for guiding economies to prosperity.

That is not to exaggerate the impact external views had on policy – this was, after all, the period when the public service’s “monopoly” over policy advice was at its peak, and its most senior members, notably Wilson, were notoriously self-sufficient.22 Additionally, with financial markets relatively underdeveloped (and in any case, heavily regulated), ongoing review by “market economists” of economic policy developments was very limited, the AMP’s Dr Harold Bell being virtually the only prominent commentator.23 Yet it would be equally wrong to dismiss or ignore the climate of opinion. Even in the early 1950s, and yet more so as the Menzies era progressed, Canberra was anything but a “hermit kingdom”, impermeable to the weight of ideas, which were also reflected in the evolving debates in institutions such as the Tariff Board and in the economic evidence presented in national wage cases. Moreover, the mere fact that, by and large, expert opinion was generally supportive of the thrust of policy made the broad direction the Government steered easier to justify and maintain.

That was all the more the case as Australian policy discussions in the period were very well served by the economics profession. Especially from the mid-1950s, the profession’s leading lights were active in the policy debates, publishing timely, thoughtful and well-researched surveys of the economy and of economic policy, both at the macroeconomic level and on specific policy- relevant topics.24 Those surveys, which were in many cases commissioned by the Economic Society of Australia and New Zealand for the Economic Record – and eventually reprinted, along with complementary pieces, in 1963 as The Australian Economy: A volume of readings, edited by H.W. Arndt and W.M. Corden – provide a strikingly clear guide to the thinking of the time.

Naturally enough, there were disagreements; and there were some dissenting voices within the profession, most notably that of Colin Clark, who emphasised the high costs of protection. Even so, what is remarkable is the extent to which the period’s most prominent economists agreed in general terms on what was happening, how to interpret it, and what policy recommendations to make. Moreover, albeit with varying emphases and occasional sharp differences, they shared a common understanding of the longer-term challenges Australia faced and of the broad approach governments should adopt – one that largely accorded with the way in which senior officials saw the world, and with the thrust of government policy.

Four elements were at the core of that view of the world. The first, and by far, most important, was the underlying commitment to the objective of national development, which meant not merely the pursuit of sustained economic growth and of full employment, but of growth at a significantly higher rate than could have occurred simply on the basis of domestic factor accumulation. Associated with that commitment was acceptance of a high level of immigration as desirable both as a means to economic ends and as integral to ensuring full realisation of Australia’s national potential.

Development was not seen solely as an economic imperative. Rather, it was also viewed as an indispensable element in the “great world struggle” between freedom and communism. As Percy Spender, the Minister for External Affairs, put it in his famous statement to Parliament on 9 March 1950, to prevail in that struggle, the world’s democracies had to ensure they were “politically stable and economically prosperous”.25 It was therefore not a coincidence that the Department of National Development was created in the same month as Spender’s statement, with R.G. Casey, its first minister, describing national development as the means “to increase our national security to a maximum”.26 Nor did this broader emphasis wane in later years; instead, as Harold Holt argued, “growth is our watchword as a government on behalf of the people of Australia. It is also the password for the sentry at the gate to our security and our prosperity”.27

A second element was the emphasis on the external constraints that could nonetheless limit the sustainable rate of growth and hence slow national development.

In part, those constraints were the natural corollary of the commitment to a fixed exchange rate, as that gave rise to a recurring tension between supporting domestic demand at high levels, on the one hand, and the need to finance any resulting shortfall in the balance of trade, thus protecting the exchange rate, on the other.

In turn, fixity of the exchange rate was largely taken as a given. It was, after all, required by the then articles of agreement of the International Monetary Fund, which Australia had joined (after contentious debate within the ALP) in 1947.28 Indeed, even those academic economists who were critical of fixed exchange rates were cautious in recommending any alternative: for example, James Meade, a future economics Nobel laureate who visited Australia and wrote perceptively about its balance of payments problems, argued in 1956 that it would be better if Australia, the United Kingdom and other countries used a “generalised system of exchange rate variation or wage-rate adjustment rather than the limitations of imports to deal with their difficulties”.29 Especially in view of Meade’s long discussion of the conditions necessary to make exchange rate flexibility possible and for a depreciation to improve the balance of trade or payments, his was hardly a clarion call to free up the exchange rate unilaterally, or even for more frequent adjustments of the exchange rate “peg” (which, as is noted below, is what Coombs advocated).30

Yet while exchange rate fixity was widely accepted, it was also apparent that it removed a policy instrument which would otherwise have helped reconcile internal balance – essentially, the maintenance of full employment – with external balance, that is, a sustainable balance of payments position. The resulting trade-offs were first illuminated by Trevor Swan in two papers that were only published long after they were written and circulated, but that were enormously influential both in the academic debate and in Canberra.31 As well as making a number of important analytical contributions, those papers highlighted the role that a national wages policy could play in simultaneously achieving internal and external balance, with adjustments to what was then known as the “cost ratio”

– a measure of competitiveness defined by the ratio of an index of the prices of imports and exports to an index of Australian wages – emerging as the instrument that could be used in place of variations in the exchange rate.

Because of its focus on the “cost ratio”, the conceptual framework Swan set out (and which rapidly became the distinctively Australian approach to analysing the balance of payments) cemented the view of wages policy, and so of the arbitration system, as a potent weapon in the armoury of stabilisation policy. The machinery of wage-setting therefore came to be seen as serving a crucial macroeconomic purpose, rather than as an institution whose primary purpose – in the Australian tradition of “accommodative” adjudication32 – was to manage industrial conflict. Swan’s model thereby fanned a debate about the rules to be applied in setting wages, with that debate’s key outcome being that wages policy should cushion the impact on employment levels of external shocks – a goal which could be achieved by linking wages (and, more broadly, earnings) to overall productivity, measured correcting for changes in the terms of trade.33

As well as the concern with short-term stability, however, there was also a longer-term element in the emphasis on external constraints. In particular, economic policy was marked by a pervasive “balance of payments pessimism” – the conviction that, were the economy left to its own devices, Australia’s exports would not expand sufficiently rapidly, over the longer term, to finance the demand for imports that would result from sustained economic growth.34

At least initially, that pessimism was shaped by the “characteristic Australian assumption that rural production cannot be increased significantly”: and, in any event, that farmers would not expand output materially even if doing so became more profitable.35 As the terms of trade continued to deteriorate, however, greater emphasis was placed on the worsening relativity between the price Australia paid for its largely manufactured imports – which increased by ten percent over the period from 1953 to 1961 – and the price it received for its (mainly primary) exports, which, over the same period, declined by more than 25 percent. In the late 1950s, a prestigious panel of experts established by the GATT had found that “it would be unwise to count upon any improvement in the terms of trade” for agricultural exporters;36 surveying the prospects for Australian primary exports a few years later, F.H. Gruen echoed that panel’s findings, concluding that:

… Disregarding the possibility of a world conflict which would make export prices one of our less important worries, there are very few factors in sight which seem likely to counteract those making for a continuation of the long-term downward trend in export prices for farm products.37

That relatively bleak view of Australia’s potential export income persisted throughout the Menzies era. It culminated in the Vernon report (discussed further below) which, despite Sir James Vernon’s crucial role in the Mount Newman project and more generally in the development of iron ore in the Pilbara,38 largely ignored the mining boom that by then was getting underway. The report presented pessimistic projections of Australia’s balance of payments, based on assumed poor prospects for rural exports and on rising dividend payments for foreign capital.39 Like the earlier analyses, those projections proved unduly grim; but the fact that they were endorsed by so eminent a committee underscores the degree to which a gloomy outlook for primary exports formed part of the mental map that shaped policy.

That gloomy outlook helped to frame the third element in the policy consensus – the need to:

… intensify the efforts that have already been made to increase Australian exports and to economise on imports, both by developing new import- replacing industries and by increasing the efficiency of existing home producers. Although primary industry should be encouraged to increase its output and exports (especially those sections of primary industry which are not dependent on heavy subsidy), it would be wise to place greater emphasis in future on the development of manufacturing exports.40

In that sense, despite the significant misgivings some expressed about the design and implementation of tariff policy,41 the desirability of diversifying the structure of the economy was broadly accepted throughout the Menzies period. Indeed, the transition away from reliance on primary industry was viewed as an indicator that Australia had “graduated to the point where it bore a stronger resemblance to the industrial nations of the world than to the regions of recent settlement of the nineteenth century”.42

Finally, there was a widely shared belief in the ability of governments both to pursue sensible long-term economic objectives and to manage the internal and external shocks any economy undergoing rapid growth was sure to experience. The risks of rent seeking were more frequently recognised than emphasized; they were certainly not regarded as fatal to an activist policy stance.43

That is not to suggest there was an indifference to the dangers of government intervention: on the contrary, the Institute of Public Affairs, in its highly influential 1944 pamphlet on post-war reconstruction, Looking Forward, had stressed the importance of not attempting to displace private enterprise and the profit motive, which were both the guarantors of individual freedom and “the most powerful of all stimulants to industrial and commercial effort and economic progress”. But the Institute also recognised the need for government to “dig the broad channels in which individual organisations can be allowed to flourish”, and in that way to “plan private enterprise”.44 This essentially pragmatic approach was later echoed by Menzies, when he said that his government had:

… no doctrinaire political philosophy. Where government action or control has seemed to us to be the best answer to a practical problem, we have adopted that answer … But our first impulse is always to seek the private enterprise answer, to help the individual to help himself, to create a climate, economic, social, industrial, favourable to his activity and growth.45

As for shorter-term economic management, this was what John Hicks later called, albeit with some exaggeration, the “Age of Keynes”:46 the feasibility of “fine tuning” was rarely questioned, and the future was seen as one in which governments would “learn to control aggregate levels of expenditure in the economy much more finely and promptly than has been the case in the past”.47

Interestingly, despite the stress on government’s role, there was very little discussion of social welfare policy, much less of using taxing and spending to redistribute income on a substantial scale. From time to time, proposals were made for taxation and expenditure reform, heavily influenced by social democratic thinking in the UK;48 but in an era that saw economic growth and full employment as the primary means of meeting social aspirations, these were never rated as priorities.

In short, the conceptual lens through which economic policy was viewed emphasised economic growth by means of rapid factor accumulation; managing that growth so as to avoid balance of payments crises; using tariff and non-tariff measures to diversify the economy, thus reducing reliance on rural exports; and relying on the capacity of government not merely to set the broad direction in which the economy should head but also to steer it actively through any turbulence. There was correspondingly less emphasis than would be the case today on making efficient use of resources; and even less on the danger that instead of serving the public interest, interventionist governments would end up redistributing income from one group in the community to another, squandering some of that income at each step along the way.

The implementation of policy

How successful did that view of the world prove? It could be said that the outcomes spoke for themselves; if full employment with price stability was ever achieved in Australia, it was in the Menzies years, to an extent not seen again until the Howard Government. And the Vernon Enquiry’s contention, that sustained growth “endows the community with a sense of vigour and social purpose”, was certainly borne out by the lived experience of the time.

There is, however, a risk in attributing to policy what it might not have caused; moreover, the signs of success may simply have hidden problems that were being bequeathed to the future. A more prudent evaluation would be that there were both hits and misses: put simply, Australia became a larger and far richer country, but efficiency was sacrificed for growth.

The area where the goals of policy were achieved to the greatest extent was in attracting factor inflows – of labour, capital and technology – that could lift the economy’s potential growth rate well above levels that would otherwise have been feasible, and in ensuring those additional resources were indeed used.

The most socially and politically salient inflows were of labour. Between 1945 and 1965, Australia received more than two million migrants, a majority with their fares to Australia paid or heavily subsidised by the Commonwealth, in return for having to remain in Australia for at least two years and to work in whatever jobs the Government gave them. Immigrants accounted for about 70 percent of the increase in workforce in the 1950s, falling to around 40 percent in the next decade: the fall in birth rates in the 1930s boosted the contribution of immigration in the 1950s, whereas in the 1960s, the baby boomers – including children of migrants – started to join the workforce in large numbers.

There was strong support for a large immigration program and, until the early 1960s, for the White Australia policy. As W.D. Borrie wrote in his masterly study of “The peopling of Australia”:

By 1945 there were few opponents of the theory that a much larger population was urgently required in the interests of security … there was a new confidence in the future which contrasted sharply with the pessimism of the ’thirties … it seemed clear that rapid population growth could only come from immigration. And finally, if pre-war theories were correct, many of the new immigrants would have to come from sources other than the United Kingdom.49

The post-war immigration program commenced under Labor: between 1947 and 1953 the Australian Government assisted more than 170 000 Displaced Persons to migrate from Europe (with most of that migration occurring in 1949 and 1950). Once the post-war shortage of shipping had eased sufficiently, Chifley and Calwell’s longer-term scheme, to recruit many more immigrants not only from Northern but also from Southern Europe, could come into effect. Their motivation was to facilitate transition to a peacetime economy, by reducing bottlenecks in essential industries and so avoiding price and wage inflation, especially after the defeat in 1948 of the referendum to vest the Commonwealth with power to control rents and prices.50 Immigration Minister Calwell set an immigration target of one percent of population, of “persons most needed for national developmental and other essential undertakings of Commonwealth and State Governments and of local government authorities”.51

Yet once Labor went into opposition, it continually criticised the Government for not halting large-scale immigration whenever there was unemployment or a housing shortage.52 In contrast, Menzies, who had strongly advocated an expanded immigration program as part of post-war reconstruction, maintained that commitment once in office, although the scale of the program varied from time to time. Periodically, immigration targets were set, which were generally undershot in the early post-war years, and over-filled later.53 The important point was that the migrants turned out to be, as Borrie put it, “ideal settlers” who, under the terms of their contract, “could be directed to points where labour was most needed, such as developmental projects, extractive industries, iron and steel and so on”. Public spending on resettlement within Australia was minimal: Borrie estimates it at less than £40 per head, with most migrants being housed in accommodation that had been built as part of the war effort. Moreover, as they brought few funds with them – Borrie estimated about £90 per head – and (non-British subjects) were excluded from unemployment benefits, they had very strong incentives to find and retain work, all the more so as a record of steady employment was crucial in securing access to a mortgage. Although there has been surprisingly little analysis of the matter, it seems reasonable to suggest that they ensured a high level of mobility and flexibility in the labour market.54

The inflows of labour were paralleled by inflows of foreign capital. In 1949, the world was still experiencing an excess of demand over supply, manifest as “the dollar shortage”. Many countries, and not only the former belligerents, were looking beyond reconstruction, towards development: the aim was not merely to restore living standards but to improve them materially. This required large-scale investment in productive capacity, in infrastructure, in housing and in motor vehicles.

Within this world economy, Australia sought to achieve one of the fastest rates of economic growth. This involved adding more to world demand than to supply, with the gap reflected in imports that exceeded exports, to be financed through net foreign borrowing and investment, or by sales of Australian assets to foreigners. But the lesson drawn from past experience was that, although public borrowing had financed an impressive railway system, servicing the debt imposed large costs in the depressions of the 1890s and the 1930s. A common interpretation was that, even putting aside the business cycle, public borrowing internationally had not generated a structural improvement in the balance of trade – more additional exports than imports – sufficient to provide the foreign exchange needed to service the debt.

Private borrowers and investors, on the other hand, were more driven by profits than by politics, and so were more likely only to incur liabilities when matched by assets with net revenue-generating prospects. Additionally, in bad times, private borrowers either defaulted on or re-negotiated their debts; and, for direct investment in Australian enterprises, foreign owners suffered the loss of equity when downturns occurred. As a result, private inflows were less likely to lead to situations in which governments had to impose fiscal contractions, thus slashing the economy’s rate of growth, so as to service commitments to foreign providers of funds. And as well as involving less risk, foreign investment could serve as a means of transferring technology and know-how, including modern managerial methods.55

Nonetheless, in 1948, the then Prime Minister Chifley stated that his government was opposed to overseas borrowing, and that Australia should live within its sterling and dollar incomes.56 And although Labor welcomed General Motors’ investment in General Motors Holden, it remained cautious about foreign private capital, unless directed or stringently regulated by government. Even in 1961, the Leader of the Opposition, Arthur Calwell, said that “It’s time for a change” in a long list of matters, including “the open-door policy for foreign capital with no Government plan for the protection against take-over bids of Australian-owned enterprises, and of our great national assets”.57

In contrast, as with immigration, the Menzies Government welcomed capital inflow, the vast majority of which was on private account: 92 percent, from 1948- 9 to 1962-3; three-quarters was in manufacturing, especially chemicals and oil refining (21 percent); founding, engineering and metal working (14 percent); and then in vehicles, electrical goods, food and related, and, finally, “other”, each accounting for around 10 percent of the total share valuation.58 Foreign ownership rose in line with the injection of foreign capital: in 1952, foreign firms accounted for 12 percent of the assets of the top 100 non-financial companies; by 1964, that share had risen to 41 percent.59

Significant as these inflows were, it is important to keep their scale in perspective: between 1948-49 and 1964-65, the balance of overseas capital account averaged less than two percent of GDP – that is, foreign capital inflows added one-fiftieth to the pool of Australian-produced goods and services, available for exports or absorption as consumption and capital formation.60

As a result, more than 90 percent of capital formation was financed through domestic savings. That was all the more remarkable given the high investment rate, with gross domestic fixed capital investment rising to account for nearly a quarter of GDP in the decade from 1953-54 to 1963-64, compared to 17 percent for the United States and just 15 percent in the UK. Private non-dwelling investment, which had rarely exceeded five percent of GDP in the years subsequent to federation, climbed from 6.8 percent of GDP in 1949 to 12.5 percent of GDP in 1966.

The tightly regulated financial system played a marginal role in mobilising the savings that financing such sustained investment rates required: financial intermediation, measured by the ratio of financial assets to GDP, seems to have fallen over the period and, in any case, was at low levels by international standards.61 Rather, business investment was financed primarily by retained earnings, which were high in an economy with buoyant demand and in which wage moderation, cartels and trade protection ensured many producers earned substantial rates of return. As for households, consumer credit began to emerge, largely from non-bank institutions such as finance companies, but real interest rates were relatively high.

That is not to suggest financial markets remained unchanged. On the contrary, markets for government and non-government securities became larger and deeper; foreign merchant banks expanded their presence; and rising competition from non-bank financial institutions prompted a competitive response from the established banks, including in terms of lobbying, reasonably successfully, for regulations to be relaxed. Moreover, and importantly, the Government, despite sustained opposition from Labor, separated the Reserve Bank from the Commonwealth Bank, establishing the Reserve Bank of Australia on 14 January 1960. As its historian has noted, that “proved to be a fundamental turning point in the history of central banking in Australia”, providing the basis for an increasingly sophisticated approach to the implementation of monetary policy.62

Those developments were significant but they were less important to the pace and direction of economic growth than was the ability of firms and households themselves to save the funds they needed to finance the investments they wanted to undertake. That ability was assisted by the broad stance of fiscal policy, at least in the sense that the aggregate call Australian governments made on national savings was relatively tightly managed.

Growth placed significant pressure on infrastructure, not solely because of greater population but also through rapid increases in the number of cars on the roads, in electricity demand and in the stock of homes, many of them in new, outer-lying suburban areas. And adding to those pressures, the jump in the birth rate in the late 1940s soon necessitated a progressive extension of buildings to accommodate the increased intake at succeeding levels of education. (On Menzies and education, see the chapters in this volume by Melleuish and by Pincus.)

But despite those pressures, public borrowing, as managed through the Loan Council, fell from 8.2 percent of GNP in 1951-52 to 4.5 percent of GNP in 1965 -66.63 With public borrowing at relatively low levels, and inflation gradually eroding the quantum of public debt in real terms, public debt, which had peaked at 120 percent of GDP in 1946, declined steadily to 52 percent in 1965 (Table 1), setting the basis for its further fall to barely 8 percent of GDP in 1974.64 As a result, government made space for households and the private sector to use domestic savings to finance their investments, rather than using those savings for its own purposes.

To that extent, the “structural” fiscal position assisted economic growth; but whether the attempts to sustain rapid expansion by “fine tuning” the economy over the course of the business cycle succeeded is more contentious. As Figures 1 (unemployment) and 2 (inflation) indicate, the macro-economic record is remarkably good when considered in a longer historical perspective. This was not, however, the ruling contemporary opinion; and much of the academic commentary has been relatively critical: for instance, Artis and Wallace,65 in an informative and extended budget-by-budget account, concluded that policy action was never quite right in terms of its timing and extent.66

A full assessment of the controversy – including the struggle for supremacy in setting and implementing macroeconomic policy between the central bank, headed by Coombs, and the Treasury, headed by Wilson – would require a more detailed treatment than can be given here. Nonetheless, there were two crucial episodes in which macroeconomic policy was used for the purposes of short-term stabilisation – the Korean War boom and bust, and the 1951 “horror” budget; and the boom, credit squeeze and bust of 1959-61 – with each highlighting the broader point.

The circumstances of the first episode are well known, especially given the debates surrounding the sharp improvement in Australia’s terms of trade that began in 2003-04. In September 1949, the Chifley Government had devalued the £A by 30 percent against the US dollar (copying Sterling and so maintaining the parity between the Australian and British currencies). Following the outbreak of the Korean War in 1950, however, export income rose almost two-thirds, as the US aggressively entered the market for wool and other resources, driving up Australia’s external terms of trade by 50 percent in one year (Figure 4). Inflation rose sharply, and under the system of quarterly indexation which was then in place, the increased prices were soon followed by higher wages. Monetary tightening, which was the initial response to the acceleration in inflation, proved insufficiently effective; and since the Treasurer, Arthur Fadden, accepted the advice of his department (which both suited his party, the Country Party, and was consistent with the approach recommended in the 1945 White Paper on full employment67) not to appreciate the currency, the Government imposed what the Opposition called “the Horror Budget” in October 1951, which budgeted for a substantial surplus to be achieved mainly by means of tax increases. Additionally, so as to restrain domestic demand, woolgrowers were required to deposit 20 percent of their earnings into restricted accounts.

Fadden also accepted departmental advice against a rise in interest rates – as advocated by Coombs – chiefly on the grounds that the consequent fall in the market price of government securities would violate promises made to the lenders, including many small savers who had patriotically bought those securities during the war years at the cost of considerable sacrifices. Moreover, it was not clear how great a rise was needed, given the extent of “credit rationing” (which meant that the demand for loans greatly exceeded supply at current rates, reducing the efficacy of a rate increase) and the thin market in government securities.68

As a result, the emphasis was placed on fiscal adjustment. Seen in terms of its immediate goals, that approach was relatively successful. Inflation was quickly squeezed out of the system, at some, but highly transient, cost to output.69 And, as well as quelling inflation, it can also be argued that the sharp fiscal tightening eliminated the risk that a temporary improvement in the terms of trade would be translated into a permanent increase in public expenditure.70 Whitwell, having noted the dismay and anger that this budget elicited, nonetheless praised it as a positive, decisive step: the first explicit use of Keynesian fiscal policy for anti- cyclical purposes, this was an event of major significance in Australia’s budget history.71

That said, it is also clear that the timing was poor, in that the tightening coincided with a broader slowing that came as the terms of trade began to fall. Moreover, there are also persistent claims that the Government should have responded through a revaluation,72 although (for the reasons already noted) these claims bear little relation to the debate at the time or to the broader international circumstances.

Similar issues of timing and extent arise with respect to the tightening in 1960-61, variously referred to as the “Holt jolt” (Harold Holt having succeeded Arthur Fadden as Treasurer in December 1958) or, more broadly, as the “credit squeeze”. Designed as a response to a pickup in inflation in 1959, which in turn had been associated with a real estate boom whose origins lay in domestic credit expansion, the package ultimately comprised removal of import licensing, a series of deflationary fiscal measures and a substantial and sustained monetary tightening, including – unusually – an increase in interest rates. At the time, the effects were seen as exceptionally severe, both because GDP fell by some two percent and because the unemployment rate rose to what was then considered an unacceptably high 3.2 percent.73 Moreover, the impacts were made all the more visible by some spectacular corporate failures, especially of real estate developers and non-bank credit providers, which were blamed on the sudden removal of tax deductibility for certain fixed interest payments.74

Subsequent analysis has qualified the harsh judgments contemporaries passed on the “credit squeeze”, which was widely held responsible for the Government’s near defeat in the 1961 election.75 As with the “horror budget”, the proximate goal of reducing inflation was achieved, while both output and employment recovered relatively promptly. Nonetheless, it is also clear that the impact on economic activity was greater and more adverse than expected, leading to a corrective mini-budget in February 1962.

Overall, both episodes highlight the limitations on stabilisation policy. At the time of the 1951 Budget, ironing out the economic cycle was a goal not only recently enunciated, but yet barely attempted anywhere in the world. Keynes in the 1930s had been concerned with the scope for using fiscal policy to combat a huge slump, not for smoothing out relatively minor periods of excess or deficient demand.76 The outgoing Labor Government – despite the caution expressed in the 1945 White Paper – fondly believed that it could, whenever the economic environment required, quickly switch public infrastructure projects on and off; experience, including in recent decades, suggests that it over-generalised from the efficacy of economic controls during wartime. Even Keynes’s jest of stimulating the economy by having the unemployed digging for bottles that were purposefully buried with pound notes inside, would take time to organise and turn on and (especially) to turn off.

Moreover, government then lacked what would now be regarded as basic up-to-date economic data (such as quarterly national accounts, which only became available in 1960) and the tools with which to analyse them. Nor was the state of the art much more advanced at the time of the “credit squeeze”, where predicting the likely effects was rendered all the more difficult by its reliance on a far broader suite of monetary and fiscal instruments than had been used in 1951. Policy was therefore being set under highly imperfect information; as Treasury itself noted in connection with the 1962 mini-budget, some degree of “stop/go” was inevitable, since the Government had to “adapt its measures to changing circumstances,” given that “the effect of economic measures cannot be calculated in advance with close precision”.77

Expecting “fine tuning” to prove successful may therefore have been asking too much; that it was so extensively used attests more to the era’s confidence in government than to a recognition of the constraints within which governments must operate.

In short, the greatest success of economic policy was in making the resources available for sustained growth, ensuring that government’s call on those resources did not crowd out private uses, and, more generally, in establishing and maintaining public confidence in the Government’s commitment to keeping growth at high levels, which in turn encouraged firms and households to make long-term investment commitments of their own. Yet policy did far better at mobilising capital, labour and technology than at promoting their efficient use. In other words, a price was paid, in terms of the efficiency with which resources were allocated and employed, for the commitment to super-rapid expansion.78

The costs to efficiency

Although the economy expanded rapidly, much of the growth was extensive— that is, achieved by increasing the volume of factors consumed – rather than intensive, that is, derived from making better use of given resources. According to one study, undertaken at the end of the 1970s, some 70 percent of the output increases secured during the years of rapid growth were attributable to the growth of labour and capital inputs, with a “residual” of only 30 percent coming from growth in the productivity with which inputs were used.79 Those proportions are roughly similar to the experience in Canada; in contrast, estimates for the United States attribute around 50 percent of economic growth during this period to greater productivity, while the share due to productivity was even higher – at around 65 percent – in Western Europe, leaving only 35 percent or less of growth coming from increased factor usage.80

In part, the small size of the productivity component reflected the fact that while aggregate growth rates were high, they had been obtained at the cost of especially high levels of investment. Taking account of changes in working hours, N.G. Butlin estimated that labour input had risen – over the entire period from 1939 to 1961 – at an annual rate of 1.8 percent; in contrast, the annual rate of increase in capital inputs was 2.8 percent, implying that while labour input by the end of the period was 48 percent greater than it was at the beginning, capital inputs had grown by 84 percent.81

The inference is that capital formation yielded relatively little “bang for the buck”, with one study estimating that if, over the period from 1953-54 to 1964- 65, Australia had had the same level of capital productivity as the major advanced economies, the annual growth rate of GDP would have been 2.3 percentage points higher.82 Even accepting the many caveats so high an estimate invites, it is reasonably well-established that capital was not as efficiently used as it might have been; W.A. Sinclair noted that while much of the “return to a more rapid rate of economic growth in Australia [in the post-war years] can be attributed to a marked increase in aggregate investment measured as a proportion of gross national product … the contribution made by capital formation … derived much more from its high aggregate level than from the fruitfulness of its components”.83

Although not readily proven, there is every reason to believe that the predominance of extensive, rather than intensive, growth reflected the institutional arrangements the Menzies Government had inherited and retained – and, most especially, protection. The greatest effects were in manufacturing, whose share of GDP at constant prices rose from 19 percent immediately before the Second World War to around 30 percent in 1960-61. Productivity levels in manufacturing grew rapidly during this period, with output per employee-hour three-quarters higher in 1963-64 than in 1949-50. The increases, however, occurred from a very low base, both in international terms and compared to the rural sector: in 1948, output per unit of labour input in agriculture was 2.5 times greater in Australia than in the UK, while Australian labour productivity levels in manufacturing were only 70 percent of the UK’s.84 Substantial as they were, the productivity increases that occurred in the Menzies era were not sufficient to close the international gap, given that productivity growth rates in the other advanced economies were also especially high.

At the heart of the problems was that so much of the investment in manufacturing went into import replacement, rather than into export-oriented activity. As the German economist, Gottfried Bombach, put it, in surveying Europe’s own post-war episode of ultra-rapid growth, “export demand is uncomfortable demand as compared with home demand”, requiring “competitive product prices, high productivity levels and a continuous adjustment of the product mix”; it is, as a result, “an important learning process” that triggers efficiency improvements in the economy as a whole.85 But, instead of being oriented to world markets, made-to-measure protection, which set tariffs so as to offset the cost penalty associated with domestic production, encouraged a focus on “leaping over the tariff wall”.86

In theory, protection was only to be granted to “economic and efficient” production; but, in practice, the impossibility of determining, through an administrative process, what was “economic and efficient” and what was not, together with the political pressures producers could and did bring to bear, ensured protection was extended far more broadly. Moreover, with reasonably ready access to finance, entry into protected activities was likely to occur up to the point where any rents had been dissipated in excess costs, compounding the inefficiency. And collusion, reported to be widespread,87 would then have allowed otherwise marginal producers to remain viable, as they could shelter under the umbrella of prices set to provide supra-normal returns to the more efficient firms.

The result was to encourage a proliferation of small plants. Relatively high domestic transport costs (arising from State government controls over road haulage and Commonwealth government controls over shipping) and State government policies modelled on those adopted by Sir Thomas Playford, Premier of South Australia from 1938 to 1965, accentuated the problem,88 as even quite small production runs were dispersed between the States. With domestic producers “covering the waterfront” in terms of the range of products they supplied, production runs already too short were further fragmented into myriad product varieties.

For example, by the mid-1960s, five international companies producing a dozen models competed for a motor vehicle market of about 350 000 units a year, which was arguably insufficient to support two firms operating at anywhere close to minimum efficient scale. Similarly, in oil refining, where economies of scale were also important, a study found that “the Australian market for petroleum products must be treated as five or more separate areas. Within each of these marketing areas the demand for petroleum products at present is insufficient to support one refinery which would be taking full advantage of the economies of large-scale production”.89 And a detailed analysis of the steel industry in the early 1960s concluded that “for years, the industry has suffered from the inability to apply large-scale technology which, moreover, is not stagnant and on balance is probably favouring increasing scale”.90

Manufacturing, although its output nearly trebled in volume terms dur- ing the period, therefore continued to have extremely low productivity levels compared with the United States and Canada, despite the benefits of technol- ogy transfer via direct foreign investment, and even though the industrial com- position of manufacturing broadly mirrored that of the United States.91 Many economists believed the main benefit from immigration would be increasing returns to scale:92 as far as manufacturing was concerned, protection seems to have negated that benefit.

Manufacturing was not the only sector where protection undermined efficiency. Primary exporters bore a large share of the costs of manufacturing protection, which imposed a tax equivalent to some 20 percent of gross export returns;93 and although some of the more efficient primary producers – such as the national Woolgrowers’ Council – opposed protection, many others had instead long sought it for themselves. As W.K. Hancock famously observed decades earlier:

It might have been expected that the primary industries which produce for export would have revolted against this system. Instead, the weaker of them have adopted the policy of the French nobleman, who declared, while the old monarchy went riotously bankrupt: “When others hold out their hands I hold out my hat.”94

Pressures for assistance intensified as agriculture likewise experienced an upsurge in investment. Gross annual agricultural investment, measured at current prices, was about ten times higher in the first half of the 1950s than it had been in the pre-war years.95 In some unprotected sectors, notably wool, substantial increases in output were achieved by the larger Australian producers at costs that, by world standards, were relatively low; but that was not the case for the smaller and more marginal wheat-sheep farmers, who were squeezed between rising domestic costs and world prices that fell as competition from synthetics intensified. Those smaller farmers, who operated with less than half the number of sheep per person employed by the larger producers, earned incomes that already by the early 1960s could not have covered investment costs;96 they provided the most vocal and effective support for the repeated attempts – promoted by the Country Party and especially by John McEwen – to introduce a reserve price scheme, with that scheme coming into effect, eventually with disastrous consequences, in November 1970.

The panoply of schemes that benefited the more labour-, land- and water- intensive parts of agriculture, going from dairying and poultry farming to sugar and dried vine fruits, were no less harmful. For example, the ubiquitous home-price schemes, which sought to stabilise producers’ incomes by setting a price to domestic consumers that at least partially offset fluctuations in export prices, not only discouraged the use of other forms of risk management but also induced sharp shifts into the supply of the products covered by home price schemes when export prices were low (and supported home prices high), reducing national income.97 At the same time, subsidies to agricultural inputs, ranging from preferential loans to provision of irrigated water and transport at charges that were far below cost, both distorted the input mix and shifted output towards those forms of primary production that made the most intensive use of the subsidised inputs.98

In short, although productivity growth, evaluated at domestic prices, was high, a substantial share of the greatly increased supply of labour and capital was being diverted into protected, relatively inefficient, uses.

Whether the arbitration system, the other major plank of the Menzies Government’s institutional legacy, compounded the inefficiencies is much harder to say. Union membership, which stood at 54 percent of the workforce in 1945, had climbed to 58 percent by 1950 and then rose further to peak at 63 percent of the workforce in 1953.99 Coming to office after a major strike wave, the Menzies Government legislated a number of changes to the industrial laws, including facilitating the imposition by the then Commonwealth Court of Conciliation and Arbitration of penalties on striking unions, as well as making a series of significant appointments to the Court itself.100

It would be incorrect to assume those appointments were determinative in the Court’s controversial decisions of the period, including the decision in 1953 to abandon indexation of the basic wage. Those decisions were largely shaped by the Chief Judge, Sir Raymond Kelly, who had been appointed under Labor.101 Indeed, Harold Holt, the then Minister for Labour, was impatient with Kelly’s “inflexibility” and regarded the Court’s tendency to clash with the unions as a menace to industrial peace. So as to reduce the risk that posed, the Menzies Government actively sought to improve its relations with the ACTU, and used the High Court’s 1956 decision in the Boilermakers’ case102 both to reduce Kelly’s role and to appoint Richard Kirby, widely viewed as sympathetic to the unions, to head the newly-established Conciliation and Arbitration Commission.

In short, the Menzies Government, although it was deeply concerned about illegal strikes, did not seek to challenge or otherwise undermine the industrial relations system, all the more so as it did not want to be cast as a government dominated by “big business”. Moreover, especially given the strengthening of the penal powers, the system was seen as useful in promoting moderate unions while imposing some constraints on those unions that remained under communist control. There was, as a result, certainly the potential for the system to influence the course of economic growth significantly.

In practice, however, a number of factors mitigated its impact, reducing, if they did not entirely avert, the distortions it later caused. These included the sustained number of new entrants into the labour market, and the mobility and willingness to adapt of the migrant workforce; the reduction in commuting costs associated with the rapid increase in car-ownership; and the growing concentration of employment in the major urban centres, all of which made it easier for workers to switch jobs. At the same time, the split in the ALP, and the even more bitter struggle between communists and anti-communists in the union movement, may have made a number of union leaders, as well as the ACTU, less inclined to challenge a government whose commitment to resisting communism they admired.

Exactly how much effect each of these factors had is difficult to say. Nonetheless, what is clear is that the basic wage – which in 1966 was replaced by a “minimum wage” – barely increased in real terms from November 1952 to November 1967,103 while, during the same period, the real product wage – that is, average earnings deflated by the GDP deflator – rose at an annual rate of two percent,104 which was only 60 percent of the increase in GDP per labour hour.105 This was, in other words, a period of sustained wage moderation, which, along with the factors already noted, made for labour market flexibility and underpinned the exceptionally low rates of unemployment.

It was also clear that serious headwinds were building up. By the mid-1960s, wage cases were becoming increasingly contentious; the number of industrial disputes edged up, initially in manufacturing before leaping to a higher plateau for all industries in 1968; and wages drift became more pronounced, as wage increases were secured outside the arbitration system. These trends may partly have reflected generational change – as the entry into the labour force of younger cohorts, who had not experienced depression and war, brought a revolution of rising expectations – as well as structural change within the union movement, with the larger unions gaining members at the expense of smaller ones and the divisions associated with the Labor split fading into the background. Be that as it may, they set the groundwork for the Whitlam Government’s ill- judged wages policy, with the “wage explosion” of 1974, when average weekly earnings increased by 26 percent, signalling the end of full employment. Just as the industrial relations system may well have prolonged wage moderation in the Menzies era, so it now became a way of securing and protecting wage increases that in a more decentralised labour market would probably more promptly have been unwound.106

It was therefore hardly irrational for the Menzies Government, notwithstanding an at times fraught relationship with individual members of the Court and later of the commission, to view the Deakinite industrial relations system as highly successful, especially compared to the widely publicised problems being experienced in the UK. In preserving and entrenching it, the Menzies Government created risks that, as with industry protection, played themselves out, at high cost, in the years to come.

The balance

Overall, economic growth, sustained though it was, was distorted by the Deakinite framework, contributing to the severity of the crises that began in the 1980s. To that extent at least, it remained the case that, as Hancock had suggested in 1930, “the Australians had not grown rich because of their policies, but … being already rich, … have been able to afford them”.107

Nonetheless, the harshness of that judgment needs to be balanced in several important respects. To begin with, the heavily assisted segments within manufacturing and agriculture probably never accounted for more than a fifth of output and employment. Moreover, by preserving an economy based on free enterprise rather than pervasive nationalisation, the Menzies Government created room for the diversity and entrepreneurship that would help to ease the transition away from those segments, and also ensured at least some of the capital losses that transition involved fell on private investors instead of taxpayers.

At the same time, the politically courageous trade treaty with Japan in 1957 began the re-orientation of Australian trade towards Asia that would, in time, prove crucial to the move to a more outward looking economy;108 and that re- orientation was also encouraged and greatly assisted by the lifting of the export embargo on iron ore and by the welcoming attitude to Japanese investment in Australia’s natural resources. Additionally, the deepening and gradual liberalisation of financial markets allowed those markets to begin playing a more significant role in allocating savings to their most productive uses and enhanced the effectiveness of monetary policy, as did creation of the Reserve Bank.

In all of those ways, the Menzies Government, although it perpetuated a legacy of protection, contributed to putting in place the foundations that made it possible for the Deakinite legacy to be at least partly overcome. Its cautious fiscal policies also helped. In the immediate term, they freed up savings for use in the private sector, underpinning high levels of private investment. And, seen over the longer term, their result was that when growth began to slow and became more volatile, the Commonwealth had little debt; much like the Howard Government, that meant the fiscal errors made by the governments that succeeded Menzies did not lead to levels of indebtedness that could not ultimately be brought under control.

Moreover, far fewer costly commitments had been made in areas such as pension and health care than in Europe: expressed as a share of GDP, Australian spending on social transfers, above the OECD average at the start of the period, was nearly a third below it in 1970, and actually fell slightly in the course of the 1960s.109 With a much narrower base of entitlements to start from, not even the more profligate governments that followed could readily mandate transfers and taxes on a scale comparable with the European welfare states.

Last but not least, the Menzies Government retained, at times notwithstanding strong pressures to the contrary, the Australian tradition of delegating to entities independent of executive government a crucial role in the public policy process.110 Although that could entrench vested interests – as in the industrial relations system – it could also provide policy entrepreneurs with an institutional platform from which to promote far-reaching reform, with the Tariff Board and the Reserve Bank being spectacular examples.

Those mitigating factors are substantial; but they do not end the list of considerations that must be weighed in the balance. It is, in particular, important to stress that the alternative government was committed to aggravating, rather than correcting, the inward-looking orientation of policy – and, in addition, to nationalising large parts of the economy, including banking, the steel industry and aviation. Nor was it supportive of the developing economic relationship with Asia, and it voiced strong opposition to the 1957 trade treaty with Japan, as well as to Japanese investment in Australia’s natural resources. Given those policy commitments, no matter how great the adjustment costs future generations bore for the Menzies Government’s policies, they must pale into insignificance compared to those a Labor government would have imposed, had the promises Labor made at successive elections been adopted.

Conclusion

The 1950s and 1960s were a golden age of Australian economic growth: output rose at a rate not experienced since the aftermath of the gold rushes; unemployment and inflation were extremely low, both in absolute terms and compared to overseas; as incomes increased, a sense of confidence and of economic security, so seriously damaged in the inter-war years, became the norm, encouraging business and households to make long-term investment decisions.

The international economy more broadly was experiencing a period of exceptional prosperity. But with the Australian economy’s trade intensity declining, domestic prosperity was by no means simply the consequence of global buoyancy. The dynamic of growth was largely internal and economic policy played an important role in making rapid expansion possible. High levels of immigration brought millions of “New Australians” who were strongly motivated to work and save. Sustained inflows of foreign capital brought technology and management skills, especially from the United States, that allowed local industry to meet rapidly expanding demand for consumer and capital goods. And a cautious fiscal policy, which kept public spending under tight control and avoided the unfunded promises that characterised the European welfare state, ensured the growing pool of savings could be used by the private sector to finance a sharp rise in the share of investment in GDP.

As well as setting those foundations for growth, the Menzies Government, drawing on the Deakinite legacy, also actively shaped its direction. Protection was especially important in that respect, with the “made to measure” tariff (and during the period from 1952 to 1960, generalised import licensing) stimulating widespread import-replacement, while a growing range of protective schemes shifted agricultural output towards the more labour-, land- and water-intensive parts of rural industry. The result was to distort allocation of resources towards activities that were uncompetitive internationally—and which, despite rapid productivity growth, remained so.

The Deakinite arbitration system was also preserved and, in some respects, entrenched. It retained all of its arcane features – for instance, the 1966 Metal Trades award recognised 330 classifications of work, and specified 53 different rates of pay with gradations of as little as one cent a day between them. Yet its impact during the period itself was weakened by the sheer size of the migrant inflow, as well as by the deep divisions within the union movement and, perhaps most of all, by the caution of generations scarred by depression and war. Together, those factors gave rise to years of wage moderation that underpinned the extraordinarily low rates of unemployment.

It is true that by the end of the Menzies era, expert opinion was starting to change. The Treasury had issued papers emphasising the importance of efficient resource allocation; and, increasingly, the McEwenite dogma was under attack, within the official family and outside it.111

Even so, change was slow and uneven, as the report of the Vernon Enquiry itself makes clear. Tasked to inquire into a long list of matters – while bearing in mind “that the objectives of the Government’s economic policy are a high rate of economic and population growth with full employment, increasing productivity, rising standards of living, external viability, and stability of costs and prices”

– the Enquiry argued there were limits to the capacity of Australia to absorb immigrants. It was also sceptical of foreign investment, fearing too great a degree of foreign control and that there might be insufficient foreign exchange earnings to service the debt or equity in the future.

These were hardly more outward-looking views than the Menzies Govern- ment had articulated; moreover, on protection, the report accepted most of the usual arguments in its favour: diversification of industry; redistribution to- wards urban workers, without depressing rural land values (13.59); stimulus to economic growth, especially nurturing “infant industries” that have, in Australia, by and large grown up (13.65); and a steady increase in capital investment. As for the future of tariff policy, it was cautious, rejecting all the proposed alterna- tives to made-to-measure protection, including unilateral liberalisation, currency devaluation and a move to a uniform tariff. Nor does it seem to have given any thought to reforming the industrial relations system. Despite the storm it pro- voked, the Vernon Enquiry largely endorsed the status quo – and would have been more restrictive than the Menzies Government ever was in setting migra- tion levels and in regulating foreign investment.112

That suggests that if the Menzies Government was not ahead of expert opinion, nor was it behind it; it was largely a mirror of its age. That is unsurprising: great politicians, said Disraeli, must feel comfortable, both in themselves and in their times; and, when he was at the peak of his powers, Menzies was as great a politician as Australia has ever seen. Yet it would be wrong to think he merely channelled the popular mood; on the contrary, as a great politician, he formed the climate of opinion, positioning national development as not simply an over- riding economic goal but as a bulwark against the global threats to freedom.

The spirit of the age was also apparent in the approach the Menzies Government adopted to implementing its goals. As the American historian, Hugh Heclo, once put it, major epochs in public policy are defined “not by events, nor by ideas, but by ideas about events”113 – the “ideas about events” which motivated the Menzies Government, along with many of its counterparts internationally, included an expansive view of government’s role both in preventing depression from recurring and in promoting, sustaining and shaping economic growth.

But while far from laissez-faire, it pursued its objectives in a manner that emphasised the role of private initiative and gave considerable space to independent bodies, such as the Tariff Board, the Arbitration Commission, the Commonwealth Grants Commission and the Reserve Bank in the design of public policy. It could have been otherwise, as the examples of the UK and New Zealand114 all too clearly show; the approach Menzies adopted, with its stress on the private sector, was the result of a conscious choice, made in the face of fierce and continuous criticism from his Labor opponents. Together with the outcomes, the fact that he made and stuck by that choice amply confirms his very high place in the pantheon of Australian prime ministers.

Endnotes

* We wish to thank William Coleman, Selwyn Cornish, Bob Gregory, David Kemp, John Nethercote, John Stone and Bob Wallace for their comments.

1 The Commonwealth Court of Conciliation and Arbitration was separated in 1956 into an Industrial Court and a Conciliation and Arbitration Commission, following a High Court decision in the Boilermakers’ case. However, references to the Arbitration Commission in this chapter should be read as covering both institutions, unless otherwise specified.

2 Menzies’ approach to these matters bears out his rejection of the label, “conservative,” for himself and the Party. We hope to explore in subsequent work, we prefer the description of the policy package as “Deakinite”, to Kelly’s “the Australian Settlement” of “imperial benevolence”, White Australia, “state paternalism”, wage arbitration and protection against imports: Paul Kelly, The End of Certainty: The Story of the 1980s, St Leonards, NSW, Allen & Unwin, 1992

3 See W.M. Corden, “Import restrictions and tariffs: A new look at Australian policy”, Economic Record, 34(69), 1958, 331-46. Reprinted in H.W. Arndt and W.M. Corden, (eds), The Australian Economy: A Volume of Readings, Melbourne, F. W. Cheshire, 1963.

4 S. Richardson and P. Travers, Living Decently: Material Well-being in Australia, Melbourne, Oxford University Press, 1993.

5 P. Katic, and A. Leigh (2013), “Top Wealth Shares in Australia 1915-2012”, Fig. 4. Available at <http://piketty.pse.ens.fr/files/KaticLeigh2013.pdf> [Accessed 5 Jan 2015]; A.B. Atkinson, and A. Leigh, “The distribution of top incomes in Australia”, Economic Record, 83(262), 2007, 247-261; A. Leigh, Deriving Long-Run Inequality Series from Tax Data, Canberra, Centre for Economic Policy Research, Australian National University, 2004.

6 Parliament of Australia, 2009, Social Security payments for people caring for children, 1912-2008: a chronology – Parliament of Australia. [online] Available at: <http://www. aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/ BN/0809/children> [Accessed 29 Dec. 2015]; M. Gray, L. Qu, and R. Weston, Fertility and Family Policy in Australia, Melbourne, Australian Institute of Family Studies, 2008.

7 H. Wee, Prosperity and Upheaval: the World Economy, 1945-1980, Berkeley CA, University of California Press, 1986 (Table 14, column 5, 151). In his 1946 election policy speech, Menzies criticised Labor for having adopted “the view that immigration is undesirable so long as we have local problems of an industrial and economic kind to solve”: http:// electionspeeches.moadoph.gov.au/speeches/1946-robert-menzies

8 A. Goldbloom, J. Hawkins and S. Kennedy (2008), “A quite unprecedented achievement’? Responding to the 1950s terms of trade boom”, 7. Available at: <https,//www.researchgate. net/publication/242326775_’A_QUITE_UNPRECEDENTED_ACHIEVEMENT’_ RESPONDING_TO_THE_1950S_TERMS_OF_TRADE_BOOM> [Accessed 29 Dec. 2015].

9 D. Pope and G. Withers, “Do migrants rob jobs? Lessons of Australian History, 1861-1991”,

Journal of Economic History, 53(04), 1993, 719-42.

10 W.A. Sinclair, The Process of Economic Development in Australia, Melbourne, Cheshire, 1976, 240.

11 “Whatever justification there may be for applying such an adjustment system (to a wage assessed according to national economic capacity) in a closed economy, there can, so it seems to the Court, be none in an economy such as ours where so much of our productive effort depends for its value upon prices of exports and imports beyond the control of any Australian authority”: Fair Work Commission (2015), Basic Wage Inquiry (1952-1953) 77 CAR 497 cited in The post-war period: 1953–1965 basic wage inquiries [online]. Available at:

<https://www.fwc.gov.au/waltzing-matilda-and-the-sunshine-harvester-factory/documents/

methods-wage-adjustment/the-post-war> [Accessed 29 Dec. 2015].

12 Blanche D’Alpuget, Mediator: A Biography of Sir Richard Kirby, Melbourne University Press, 1977, 170.

13 However, it should be noted that, during the Korean wool boom, agriculture was temporarily close to its 20th century peak share (29 percent, against the 31 percent of 1917). These were therefore falls from a high level.

14 R.A. Foster and S.E. Stewart, Australian Economic Statistics, 1949-50 to 1989-90, Sydney, Reserve Bank of Australia, 1991, Table 5.13.

15 This is the (somewhat caveated) view of Neville Cain, “Trade and economic structure at the periphery: The Australian balance of payments, 1890-1965”, C. Forster, (ed), Australian Economic Development in the Twentieth Century, Sydney, George Allen & Unwin, 1971, 98.

16 Commonwealth of Australia, “The Australian balance of payments”, supplement to the

Treasury Information Bulletin, 1966, 23.

17 A technical point is that the prices of protected manufacturing goods were inflated above world prices, by the tariff and, especially in the 1950s, by import quotas. For some of the automotive industry (for example), it is likely that protection allowed the value of Australian production to fall short of the value of the imported components at world prices (implying negative value added, again at world prices). The Australian Bureau of Statistics (and its predecessors) followed international practice, when estimating GDP and its components, and used Australian prices, not world prices. For our and other purposes, however, it would be better to re-price the components of GDP at world prices (duty-free import prices).

18 M. Roser, “Sum of exports and imports and imports as share of GDP (%) 1950-2011”,

M. Nagdy and M. Roser, International Trade — Our World in Data, 2015. [online] Ourworldindata.org. Available at: <http://ourworldindata.org/data/global-interconnections/ international-trade/> [Accessed 29 Dec. 2015].

19 J. Crawford, N. Anderson and M.G.N. Morris, Australian Trade Policy 1942-1966, Canberra, Australian National University Press, 1968.

20 R. Ewing and J. Hawkins, “Business cycles in Australia”, for the Conference of Economists, 2006, Table 1, available at <https://www.academia.edu/16965511/Business_cycles_in_

Australia> [Accessed 29 Dec. 2015].

21 S. Furphy (ed), The Seven Dwarfs and the Age of the Mandarins: Australian Government Administration in the Post-War Reconstruction Era, Canberra, Australian National University Press, 2015. Available online at <http://press.anu.edu.au/titles/anu-lives-series- in-biography/the-seven-dwarfs-and-the-age-of-the-mandarins/>[Accessed 29 Dec. 2015].

22 John Howard, The Menzies Era: The Years That Shaped Australia, Sydney, Harper Collins, 2014, 356-70.

23 As well as Howard, 368, see A. Bell, “Master of codes and economics: Harold Bell, 1921- 2008”, Sydney Morning Herald, 24 June 2008, available online at http://www.smh.com. au/news/obituaries/master-of-codes-and-economics/2008/06/23/1214073145913.html [Accessed 25 Jan. 2016].

24 Of the 23 authors, 19 held chairs or senior posts in university economics or allied departments in Australia, and two other were eminent foreign economists who visited Australia (J Meade and H Lundberg). The origins of these surveys, and the role of economists in the public policy debates of the time, are discussed in H.W. Arndt, A Course Through Life: Memoirs of an Australian Economist, Canberra, Australia, National Centre for Development Studies, Australian National University, 1985, at 26-2. Economic ideas also gained influence through the pattern of recruitment into the Commonwealth public service – see S. Encel, Equality and Authority: A study of Class, Status and Power in Australia. London, Tavistock Publications, 1970, 254-5.

25 D. Lowe, Menzies and the “Great World Struggle”: Australia’s Cold War 1948-1954, Sydney, University of NSW Press, 1999, 47.

26 Ibid., 131.

27 H. Holt, Advance Australia: inaugural lecture delivered by the Prime Minister, the Rt. Hon. Harold Holt at Monash University, 11 September 1967, 3. Accessed 5 January 2015 at https://pmtranscripts.dpmc.gov.au/release/transcript-1659

28 Canada, where policy-makers had had a strong commitment to a floating exchange rate regime since the 1930s, was the only country to demand and secure a special exemption from the articles of agreement that would allow it to retain a floating rate system. Even so, it pegged its currency to the US dollar until 1950 and then from 1962 to 1970.

29 J.E. Meade, “The price mechanism and the Australian balance of payments”, Economic Record, 32(2), 1956, 239-56; reprinted in Arndt and Corden, 396-415; see also P. Coleman,

P. Drake and S. Cornish, Arndt’s Story: The Life of an Australian Economist, Canberra, Australia, Australian National University Press (co-published with Asia Pacific Press), 2007, 179-80.

30 Indeed, Meade criticised approaches that involved a crawling peg as an invitation to speculation (a “speculator’s paradise”), especially in countries that lacked well developed futures markets in foreign exchange: Meade, 413.

31 T.W.  Swan, “Economic Control in a dependent economy”, Economic Record 36 (73), 1960, 51-66; T.W. Swan, “Longer-run problems of the balance of payments”, in 1963 and Corden, 384-95.

32 M. Perlman, Judges in Industry: A Study of Labour Arbitration in Australia, with a foreword by R.M. Eggleston, Melbourne University Press, 1954, viii.

33 W.M. Corden, Australian Economic Policy Discussion: A Survey, Melbourne University Press, 1968, 12.

34 E. Lundberg and M. Hill, “Australia’s long-term balance of payments problems”, Economic Record 32(1), 1956, 28-49; reprinted in 1963 and Corden, 360-83. Lundberg and Hill projected a balance of payments corresponding to about 5 percent of GNP.

35 Corden 1968, 19 and more generally, 18-21. In keeping with that assumption, Corden’s own model (set out in W.M. Corden, “The geometric representation of policies to attain internal and external balance”, The Review of Economic Studies 28(1), 1960, 1-22), assumed the supply of exports was completely inelastic.

36 G. Haberler, R. Oliveira Campos, R. and J. Tinbergen, Trends in International Trade, Geneva, General Agreement on Tariffs and Trade, 1958, 6.

37 F.H. Gruen, “Australian agriculture and the cost price squeeze”, Australian Journal of Agricultural Economics 6 (September 1962), 1-20; reprinted in 1963 and Corden, 320-49.

38 D. Lee, Iron Country: Unlocking the Pilbara, Minerals Council of Australia, 2015, 40.

39 Commonwealth of Australia, Report of the Committee of Economic Enquiry [Vernon

Report], Canberra, 1965, 2 vols, projections at Chapter 15, Appendix N.

40 H. Lydall, “The Australian Economy, February 1962”, Economic Record 38(81), 1962, 1-28; extracts reprinted in Arndt and Corden, 80-98 (at 96).

41 See, for example, W.M. Corden, “The tariff”, A. Hunter (ed.), The Economics of Australian Industry: Studies in Environment and Structure, Melbourne, Melbourne University Press, 1963, 174-214; W.M. Corden, “Protection”, Economic Record 42 (1-4), 1966, 129-48. In

the early 1960s, C.R. “Bert” Kelly spoke in Parliament against the system of protection; and Maxwell Newton, in the Australian Financial Review and later The Australian, wrote similarly. However, they were very much in the minority.

42 W.A. Sinclair, The Process of Economic Development in Australia, Melbourne, Cheshire, 1976, 14, 240.

43 See, for example, Corden 1958, where it is noted (at 428) that because of the made-to- measure tariff, the “energies which might better go into competing on an economic basis are put into pressing for higher protection”; but where it is also suggested that these dangers can be dealt with by redirecting the Tariff Board to “do the job which Monopoly Investigating Commissions of various kinds do in other countries”.

44 Institute of Public Affairs (Australia), Looking Forward: A Post-War Policy for Australian Industry, Melbourne, Vic, Institute of Public Affairs, 1944, 25-6.

45 R.G. Menzies, ‘Address to the Liberal Party Federal Council’ (6 Apr), G. Starr 1980, The Liberal Party of Australia, Richmond, Vic., Drummond/Heinemann, 1964, 217.

46 J. Hicks, The Crisis in Keynesian Economics, Oxford, England, Blackwell, 1974, 1.

47 F.H. Gruen in Arndt and Corden, 343.

48 Particularly prominent was the social democratic reform package set out in R. Downing,

H.W. Arndt, A. Boxer and R. Mathews, Taxation in Australia, Melbourne, Melbourne University Press, 1964.

49 W.D. Borrie, The Peopling of Australia, G.J. Cohen Memorial Lecture, University of

Sydney (8 October, 1958), reprinted in Arndt and Corden, 108-9.

50 T. Sheridan, “Planners and the Australian Labour Market 1945-1949”, Labour History

1987, 53.

51 B. Chifley, Election speech, Melbourne, Vic., 28 March 1951. Available online at <http://

electionspeeches.moadoph.gov.au/speeches/1951-ben-chifley> [Accessed 6 Jan 2016].

52 A. Calwell, Election speech, Melbourne, Vic, 16 November 1961. Available online at

<http://electionspeeches.moadoph.gov.au/speeches/1961-arthur-calwell

53 Commonwealth of Australia 1965 [Vernon Report], (table 4.2, for 1945-6 to 1964-65).

54 The contribution migration made to labour market flexibility in the advanced economies during the 1950s is stressed in Organisation for Economic Co-operation and Development, Wages and Labour Mobility: A Report by a Group of Independent Experts, Paris, 1965.

55 These transfers of technology, and the resulting efficiency gains, were documented in

D.T. Brash, American Investment in Australian Industry, Canberra, Australian National University Press, 1968.

56 Sir Robert Menzies, The Measure of the Years, North Melbourne, Vic., Cassell, 1970, 99.

57 A. Calwell, Election speech, Melbourne, Vic, 16 November 1961. Available online at <http:// electionspeeches.moadoph.gov.au/speeches/1961-arthur-calwellhttp://electionspeeches. moadoph.gov.au/speeches/1961-arthur-calwell > [Accessed 6 Jan 2016].

58 Commonwealth of Australia 1965 [Vernon Report], vol. II, 980 and 995.

59 D.T. Merrett, “Big Business and Foreign Firms”, S.P. Ville and G. Withers (eds), The Cambridge Economic History of Australia, Port Melbourne, Vic, Cambridge University Press, 2015, 326.

60 Derived from Foster and Stewart 1991, tables 1.2 and 1.15. Butlin estimates that capital imports accounted for 10 percent of gross domestic capital formation in the period 1951- 1960 and for 12.2 percent in 1961-65: N.G. Butlin, “Some Perspectives of Australian Economic Development, 1890-1965”, C. Forster (ed), Australian Economic Development in the Twentieth Century, Sydney, George Allen & Unwin, 1970, Table 6.8.

61 D.T. Merrett, “Capital Markets and Capital Formation in Australia, 1945-1990”, Australian Economic History Review 38(2), 1998, 142-3. Davis and Gallman argue that the underdevelopment of Australian financial markets in the 20th century was the long term consequence of the reaction to the financial crisis of the 1890s: see L. Davis and R. Gallman, Evolving Financial Markets and International Capital Flows, Cambridge, U.K., Cambridge University Press, 2001, 642-3.

62 Selwyn Cornish, The Evolution of Central Banking in Australia, Sydney, Reserve Bank of Australia, 2010, 17.

63 R.S. Gilbert, The Australian Loan Council in Federal Fiscal Adjustments, 1890-1965, Canberra, Australian National University Press, 1973, Table 16.2.

64 K. Di Marco, P. Mitchell and W. Au-Yeng 2009, A History of Public Debt in Australia. [Treasury] Economic Roundup No. 1, 8. [online]. Available at: < http://archive.treasury. gov.au/documents/1496/PDF/01_Debt.pdf > [Accessed 4 Jan. 2016].

65 M.J. Artis and R.H, Wallace, “A historical survey of Australian fiscal policy, 1945–66”.

N. Runcie, (ed), Australian Monetary and Fiscal Policy: Selected Readings, London, University of London Press, 1971, 403-81.

66 A more recent judgment by Michael Keating is somewhat softer, but still condemnatory: “In practice, fiscal policy proved to be much less flexible than was anticipated in the 1945 White Paper on Full Employment, reflecting the unwillingness by government to vary both taxation and expenditure. Furthermore, Australia was much less inclined to use market instruments in prosecuting its monetary policy than other countries…Instead, the principal monetary instrument was variations in the amount of reserves that the private banks were required to lodge with the central bank.” M. Keating, “The evolution of Australian macroeconomic strategy since World War 2”, Ville and Withers 2015, 443-4.

67 The White Paper specified that only “permanent” changes in export incomes should be met by changes in the exchange rate: Commonwealth of Australia, 1945, Full Employment in Australia, White Paper, [online] Canberra, Government Printer, paragraphs 89 and follows. Available at: <http://www.billmitchell.org/White_Paper_1945/index.html> [Accessed 5 Jan. 2016]. H.C. Coombs, who headed the group drafting the White Paper, subsequently related that he sent a memo to Fadden in mid-1950, advocating a long list of policy responses, including an appreciation of the exchange rate and a freeing up of the interest rate: Trial Balance. Issues of my working life, South Melbourne, Sun Books, 1983, 149-51.

68 In 1954 Coombs remarked that there were limitations on the degree to which monetary policy measures could be employed in Australia, given that there was little day-to-day trade in government securities, and a lack of a market in short-term paper: Other People’s Money. Economic Essays, Canberra, ANU Press, 1971, 14-15.

69 Goldbloom, Hawkins and Kennedy, 2008.

70 J.J. Pincus, The Benefits of the Boom Revisited: A Response to John Edwards. [online]

Minerals Council of Australia, 2014. Available at: <http://www.minerals.org.au/news/the_

benefits_of_the_boom_revisited_a_response_to_john_edwards> [Accessed 5 Jan. 2016].

71 G. Whitwell, The Treasury Line, Sydney, Allen & Unwin, 1986, 105-107. (Arguably, the first Australian “Keynesian” budget was Percy Spender’s in 1940, using deficit financing and not taxation, in view of the existence of unemployed labour and other resources: see John Hawkins, “Percy Spender: an early Keynesian,” Economic Round-up, no. 2, 2011.)

72 C. Bowen, The Money Men: Australia’s 12 Most Notable Treasurers, Melbourne University Press, 2015, chapter 6.

73 R. Ewing and J. Hawkins, “Business cycles in Australia”, Paper for the Conference of Economists, 2006, Table 1. Available at: <https://www.academia.edu/16965511/Business_ cycles_in_Australia> [Accessed 29 Dec. 2015]. Foster and Stewart 1991, 151.

74 J.C. Horsfall, The Liberal Era: A Political and Economic Analysis, Melbourne, Sun Books, 1974, 80-5. The proposal came not from the Treasury but from Salter, on secondment to Prime Minister’s; it was repealed six months later.

75 J. Hawkins, “Holt: an urbane treasurer”, Treasury Economic Roundup, Canberra, 2012, 65-6.

76 Excess demand not only threatened the balance of payments, but also led to domestic inflation. (The predominant explanation of inflation then was “demand push”; only later did the flawed concept of “cost-push inflation” gain currency.)

77 Hawkins 2012, 67.

78 Regarding the period to the early 1970s, McLean concluded that “The long period of prosperity Australia experienced after the Second World War is, therefore, no mystery. The international economy was flourishing and, like many other national economies that were highly integrated into the global trading system, it shared in the postwar boom”,

I.W. McLean, Why Australia Prospered, Princeton, Princeton University Press, 2012, 209. McLean emphasised convergence, a quasi-automatic tendency for laggards to catch up with leaders in living standards. What is not explained in his account is why convergence occurred during this period, but not after it, despite the persistence of productivity gaps compared to the United States, nor what explained the differences between countries in the extent to which convergence occurred.

79 A. Kaspura and G. Weldon, Productivity Trends in Australia, Working Paper No. 9. Canberra, Department of Productivity, Research Branch, 1980. It is worth noting that there are significant uncertainties surrounding these estimates, particularly with respect to the size of the capital stock.

80 See H. Wee, Prosperity and Upheaval: The World Economy, 1945-1980, Berkeley CA, University of California Press, 1986, Table 12. It is worth noting that the relativities for Canada and Australia during this period are very similar.

81 See Butlin, 1970, Table 6.7.

82 See J. Nevile, “How Productive Is Australian Capital?”, Economic Record 43(3), 1967, Table II.

83 W.A. Sinclair, “Capital Formation”, in Forster 1970: 60-1.

84 S. Broadberry and D.A. Irwin, “Lost exceptionalism? Comparative income and productivity

in Australia and the UK, 1861-1948”, Economic Record 83 (262), 2007,Tables 8 and 9.

85 G. Bombach, Post-war Economic Growth Revisited, Amsterdam, North-Holland, 1985, 60. Some later evidence of the importance of these mechanisms for Australia is presented in H. Ergas and M. Wright, “Internationalisation, firm conduct and productivity”, in P.W. Lowe and J. Dwyer (eds), International Integration of the Australian Economy: proceedings of a conference held at the H.C. Coombs Centre for Financial Studies, Kirribilli on 11-12 July, 1994. Reserve Bank of Australia, Sydney, 1994.

86 Import licensing, during the period in which it was in operation, reinforced that effect of the tariff, as shown by G.G. Moffatt, Import Control and Industrialization: A Study of the Australian Experience, Melbourne, Melbourne University Press, 1970.

87 In addition to its reliance on import protection and on financial repression, the economic framework differed from those of recent decades in its tolerance of anti-competitive behaviour by private firms. See A. Hunter, “Restrictive practices and monopolies in Australia”, Economic Record 37(77), 1961, 25-49. Reprinted in Arndt and Corden, 268-301.

88 N.G. Butlin, A. Barnard and J.J. Pincus, Government and Capitalism, Sydney, Allen & Unwin, 1982, 127-8, 278ff.

89 J.McB. Grant, “The Petroleum Industry”, in A. Hunter (ed.), The Economics of Australian Industry: Studies in Environment and Structure, Melbourne University Press, 1982, 283-4.

90 C. Forster, “Economies of scale and Australian manufacturing”, in C. Forster (ed), Australian Economic Development in the Twentieth Century, Sydney, George Allen & Unwin, 1970, 123-69 (at 164).

91 L.B. Krause, and R.E. Caves (eds), The Australian Economy: A View from the North, Washington, D.C, Brookings Institution, 1984, 313-47. The regression results on page 337 imply a 48 percent productivity gap in manufacturing, compared with the US.

92 See, for example, H.W. Arndt, A Small Rich Industrial Country: Studies in Australian Development, Aid and Trade, Melbourne, Canberra, Cheshire, 1968, 15ff.

93 C. Massy 2011, Breaking the Sheep’s Back: The Shocking True Story of the Decline and Fall of the Australian Wool Industry, St. Lucia, Qld., University of Queensland Press, 54.

94 W.K. Hancock, Australia, London, Ernest Benn, 1930, 96.

95 K.O. Campbell, “Current agricultural development and the utilisation of resources”, in Arndt and Corden, at 306; reprinted from Economic Record, 32(1), 1956, 119-34.

96 Gruen in Arndt and Corden, 345-6.

97 Gruen, 340.

98 See especially B. Davidson, Australia Wet or Dry?: The Physical and Economic Limits to the Expansion of Irrigation, Melbourne University Press, 1969.

99 M. Rimmer, “Unions and Arbitration”, in J. Isaac and S. Macintyre, (eds), The New Province for Law and Order: 100 years of Australian industrial conciliation and arbitration, Port Melbourne, Cambridge University Press, 2004, 294.

100 B. Harley, “Managing Industrial Conflict”, in Isaac and Macintyre 2004, 335.

101 D’Alpuget 1977, 128-38; and S. Macintyre 2004, “Arbitration in Action”, in Isaac and Macintyre, 81-6.

102 R. v. Kirby: Ex parte Boilermakers’ Society of Australia (1956) 94 CLR 254 (HC) and Attorney-General (Commonwealth) v. The Queen (1957) 95 CLR 529 (PC).

103 J.R. Bray, “On the evolution of the minimum wage in Australia: options for the future”, Canberra: Research School of Economics, College of Business and Economics, The Australian National University, 2013, Figure 1.

104 Calculated from Table A.7 of M. Butlin, R. Dixon and P.J. Lloyd, “Statistical Appendix”, in Ville and Withers 2014.

105 See Butlin 1970, Table 6.7.

106 An econometric analysis is set out in P.A. McGavin, Wages & Whitlam: The Wages Policy of the Whitlam Government, Melbourne, Oxford University Press, 1987.

107 Hancock 1930, 193.

108 McEwen, advised by Crawford, was a mercantilist: more wool exports to Japan, good; more textile imports from Japan, bad. But the first could not be had without the second.

109 P.H. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Cambridge, UK, Cambridge, 2004, Table 1.2.

110 See, for example, Menzies’ spirited defence of the Tariff Board’s independence in 1962, reprinted in Crawford, Anderson and Morris 1968, 467.

111 Whitwell 1986.

112 A great deal more could be said about the Vernon report, including the background of its establishment, and the Treasury’s role in the government’s response: but not here.

113 H. Heclo, M.J. Bane, M. Kazin and A. Wolfe, Christianity and American Democracy: The Alexis de Tocqueville Lectures on American Politics, Cambridge, Mass., Harvard University Press, 2007, 24.

114 Michael Bassett, The State in New Zealand 1840-1984: Socialism Without Doctrines? Auckland University Press, Auckland, 1998.