Lessons From The Great Depression In Australia

The following is a guest post from a reader.

Having just experienced the Global Financial Crisis, the challenges of that time are still fresh in people’s minds. Australia managed to weather this crisis better than many countries, partly due to circumstance rather than good management. It is worth reflecting on Australia’s experience during the Great Depression of the 1930s, for any modern day lessons. Australians’ personal debt levels remain very high by world standards, with any deterioration increasing the chances of debt collection being required.

Dependence On Exports

In the 1920s it was wool and wheat. Now it is coal, iron ore and other resources. Australia’s economy is largely dependent on the export of primary resources. When demand for Australian exports faltered following strong demand during the wartime years, Australia’s balance of payments was affected. While Australia’s economy is now much more diversified, demand for natural resources still has a major bearing on Australia’s prosperity. Further diversification is needed to reduce this reliance.
Dependence On Limited Trading Partners
Australia had traditionally exported a majority of produce and resources to Great Britain. It was Britain’s lethargic economy, in the post World War One slump that reduced demand for Australian goods. It is now China that is becoming increasingly important to Australia. Australia escaped the worst of the Global Financial crisis (such as the high unemployment seen in some countries) partly thanks to China’s resilient demand for Australia’s natural resources. While this is fortunate, it is also a cause for concern, should China’s rapid development somehow be impeded.

Government Spending and Debt

Government spending on several major projects, having been delayed by World War One, began in the 1920s. These included building the Sydney Harbour Bridge. This temporarily masked issues surrounding reduced demand for Australian exports, but when these issues came to the fore (in higher unemployment, labour unrest) and needed to be dealt with, the government of the day was saddled with high debt from these infrastructure projects, and therefore restricted in what it could do.

To combat economic contraction during the Global Financial Crisis, the Federal Government started spending as part of their A$40 billion stimulus package. While it is arguable as to how effectively this money was targeted, it certainly had some positive effect on the local economy. This needs to be weighed up against the deficit the government has incurred in doing this, and, like in the 1930s, how much this will restrict future government spending when required.

Unemployment

Australia’s unemployment rate was around 30% at its worst, during the Great Depression. With so many people out of work, major hardship and poverty faced many Australians. There is no comparison with an unemployment rate peaking around 6% in Australia during the Global Financial Crisis.

Debt levels in Australia are high. If inflation gets out of control and interest rates necessarily need to rise to curb demand, many Australians could be vulnerable to defaulting on their debt obligations, requiring debt recovery. If this becomes widespread, high numbers of defaults could affect the economy, and eventually jobs. The experience of the Great Depression has shown what is possible when the economy falters. It is vitally important for Australians to keep their debts in check, lest this be a trigger for an economic downturn.