The Great Depression is generally accepted to have begun in October 1929 with the Wall Street stock market crash in the United States, the effects of which spread quickly spread around the world. The effect of the Great Depression on the labour market persisted for many years, with the unemployment rate taking a decade to fall from its peak to pre-Depression levels. According to the official Australian Year Book of 1933, Australia’s unemployment rate reached 30 per cent in that year. This is the most widely reported figure and relates to unemployment rates among trade union members; experts who have sought to construct historical economic statistics on a similar basis to contemporary statistics have estimated that the unemployment rate peaked at nearly 20 per cent (Butlin, Dixon and Lloyd 2014). In either case, it remains the highest rate of unemployment Australia has experienced and occurred in an era before social security.

Globally, the onset of the Great Depression triggered sharp falls in the world price of commodities and financial instability. The resulting combination of large falls in Australia’s export earnings and lack of access to overseas borrowings were the immediate external causes of the severe economic contraction in Australia and the historic increase in unemployment. In the years preceding the Depression, the Australian Government had also borrowed heavily from other countries, mostly Great Britain. With reduced ability to pay even the interest on outstanding loans, Australia faced the prospect of national insolvency. Efforts to address this entailed austerity measures that worsened the impact of the Great Depression.

Australians withdrew their savings from the banks as unemployment and reduced nominal wages increasingly affected their standard of living. Consequently, all savings banks experienced periods of sudden heavy withdrawals (commonly referred to as a ‘bank run’). The Federal Deposit Bank, the Primary Producers Bank and the Government Savings Bank of NSW all failed during the Depression. The latter was amalgamated into the Commonwealth Bank of Australia (CBA). Sir Robert Gibson, Commonwealth Bank Board Chairman, issued a public statement to try to avoid further runs on the banks, reiterating that the position of the CBA as the central bank gave strength to the banking system.

Throughout the Depression, the Commonwealth Bank provided central banking services to the commercial banks, and credit to the government.

Before the collapse

Prior to the Great Depression economic problems were already becoming apparent in Australia. In May 1929, then Prime Minister Bruce blamed the high costs of production for the country’s slowdown in economic activity. His government attempted to abolish federal arbitration of wage outcomes with the proposed Maritime Industries Bill. The Bill was defeated under claims that the government’s intention was to reduce wages and living conditions for working people. An election was called, and the Labor Party came to power in a landslide victory. James Scullin was sworn in as Prime Minister on 22 October 1929. The Wall Street stock market crash occurred shortly after the election, and the Scullin government struggled to contend with the resulting conditions.

The onset

The Commonwealth Bank Bill (1929) was passed in mid December giving the Commonwealth Bank control over gold in Australia and its import and export. It also allowed the CBA to obtain the gold reserves of the commercial banks, which were then exported to London. In September, the Mobilization Agreement was adopted by the Loan Council¹, establishing a commercial bank voluntary exchange pool for currency reserves in London. It was the responsibility of the Commonwealth Bank to finance the Australian Government; the extent to which it did this was decided by the Loan Council, and ultimately by Gibson as a representative of CBA and chairman of its board.

However, both the CBA and the Bank of England (BoE) were concerned that Australia’s financial position was worsening and that it would not be able to meet its loan repayments in London. The BoE suggested that they send an expert to Australia to investigate the situation. Gibson agreed with the proposal but thought it prudent to arrange through the Australian Government.

Niemeyer’s visit

Sir Otto Niemeyer (1883–1971), Director of the Bank of England, was invited to Australia in June 1930 as an economic policy adviser by then Prime Minister James Scullin. Australia’s ability to obtain further loans, or relief from payments on existing loans from London, would depend on the report Niemeyer would write. After arriving in July and investigating Australia’s situation Niemeyer gave his recommendations on how the country might proceed. He thought that Australians were far too optimistic about the future. It was decided that Australia had been living beyond its means – that wages and the high standard of living could not be supported by the level of productivity. The recommendations focused on balancing government budgets, cutting expenditure and reducing the cost of production. Niemeyer maintained that all loans and interest due to Britain must be paid.

The Melbourne Agreement

A conference of Commonwealth and State Ministers in Melbourne passed resolutions to address Australia’s economic and financial position on 21 August 1930. It was known as the Melbourne Agreement. Gibson and EC Riddle, the Governor of the Commonwealth Bank, attended the conference. A statement made by Gibson after the conference, ‘emphasised the urgent necessity for taking definite steps to deal with the financial position’ of Australia. Gibson supported the reforms suggested by Niemeyer. The state premiers resolved to balance their budgets, but they were ultimately unable to. Public service and parliamentary salaries were reduced, but no other action was taken.

Meanwhile, the Australian pound depreciated and the minimum wage was subject to a 10 per cent cut by the Commonwealth Arbitration Court in January 1931.

The Premiers' Plan

In 1931, the Premiers' Plan was created during a meeting of the federal and state governments in order to deal with the crisis. Government spending would be reduced by 20 per cent (including a reduction in pensions) and taxes would be increased. The Premiers' Plan was controversial and caused a split in the Labor Party.

NSW Labor Premier Jack Lang’s alternative plan included stopping the payment of interest on British loans, reducing interest paid on other loans and replacing the Gold Standard with the ‘goods standard’. Lang and his supporters were expelled from the Labor Party and formed Lang Labor. Acting treasurer Joseph Lyons and his supporters broke away from the Labor Party and formed the United Australia Party (UAP), joining with the National Party. Lang Labor and the UAP worked together to challenge the government.

The government fell and an election was held in December 1931, which was won by the UAP with Lyons becoming the Prime Minister. In 1932, Lang was dismissed after refusing to pay interest on loans to British banks, defying the federal government. He also took the extraordinary step of withdrawing New South Wales’ funds from the state bank to prevent the Federal Government from using the money for loan repayment instead of employee salaries.

Lyons’ first act of government, in January 1932, was to summon a Premiers’ Conference to ascertain the progress that had been made under the Premiers' Plan, which had been devised and introduced by the previous government. Lyons was determined to execute the plan in full, with 2 main aims: for all government budgets to be balanced and to support business through a reduction of production costs in order to increase the level of employment. Acting Commonwealth statistician Lyndhurst Giblin and Commonwealth Bank economist Leslie Melville participated in a committee appointed by Lyons to survey the economy in 1932. The committee recommended increasing the level of employment.

The British Empire Economic Conference (also known as the Ottawa Conference) was held in July and August 1932, enabling the Great Depression to be discussed among the dominion countries of the Commonwealth. Melville and Governor Riddle attended as ‘Advisors on Financial Matters’. The failure of the Gold Standard, protective tariffs to foster relationships among British Empire countries, and Keynesian theory (where the state plays a role in economic management through spending), were some of the topics discussed at the conference. Riddle exchanged correspondence with Robert Gibson discussing the conference, which can be found in the Bank’s records.

Discussions continued at the 1933 World Economic Conference (also known as the London Monetary and Economic Conference). Representatives of 66 nations attended, including the manager of the London Office of the CBA, JS Scott, who prepared reports to be sent back to the CBA Governor (Riddle) in Sydney. Melville also attended as the Financial Adviser to the Australian delegates. Global trade had declined due to nationalistic economic responses, and talks at this conference sought to revive it and stabilise foreign exchange markets.

After Gibson’s death in 1934, Claude Reading was appointed chairman of the Commonwealth Bank Board. He had been a close associate of Gibson and favoured a cautious approach to improving Australia’s financial situation. Reading was protective of the CBA’s independence and did not align its interests with the state or any political party.

In 1935, a Royal Commission into Australia’s monetary and banking systems was established. In January 1936, Reading was the first to present evidence and testify. The Commission’s report, published in 1937, recommended the establishment of a central bank with strong powers over the banking system.

As the economic conditions in Australia’s trading partners improved, especially Britain, Australia’s situation also improved. By July 1935, Australia’s unemployment rate was down to 16 per cent, and by 1937 it was 9 per cent. Lyons served 3 consecutive terms as Prime Minister and recovery was slow but steady. By 1939, demand for goods and services had risen due to preparations for the Second World War.

The effects of the Great Depression, including on central banking

The contractionary policies that were intended to prevent national insolvency, but had the effect of amplifying the level and persistence of unemployment, would not be accepted as appropriate today. Policy frameworks have since been informed by more recent economic ideas, including those of Keynes, and different policy instruments have become available.  

The Great Depression served to increase the responsibilities of central banks. Prior to 1929, the only real central banking function managed by the Commonwealth Bank was the note issue and the compulsory settlement of inter-bank balances. By the mid-1930s the Commonwealth Bank had acquired many more functions, including controlling Australia’s gold reserves, the provision of deficit finance, control of the exchange rate, and influencing domestic interest rates. The Great Depression acted as a catalyst to the Commonwealth Bank adopting the role of Australia’s central bank.

Prominent People

Lyndhurst Falkiner Giblin (1872–1951)
With a background in mathematics and statistics, Giblin was a member of the Committee of Economists and Under-Treasurers that advised the Loan Council in May–June 1931, which led to the formulation of the Premiers’ Plan. Giblin was exempt from the cuts to public servant salaries as he was employed by the University of Melbourne in 1931, yet he requested a wage reduction of 25 per cent because he believed in the Premiers' Plan. He was appointed to the Commonwealth Bank Board on 23 October 1935 for a 7-year term, which ended on 22 October 1942.

Sir Robert Gibson (1863–1934)
A businessman who had emigrated from Scotland, Gibson was invited to become a member of the Commonwealth Bank Board of Directors in 1925. Subsequently, he was elected vice-chairman, and became chairman in 1926. Gibson had no experience in banking and his role centred on policy decisions and liaising with government. 

Sir Leslie Melville (1902–2002)
After working as a public actuary and professor of economics in Adelaide, Melville served as economist to the Commonwealth Bank from March 1931 until 1950. He was a prolific writer and some of his correspondence has been preserved in the Bank’s Research Department correspondence files.

Sir Claude Reading (1874–1946)
Upon leaving school, Reading worked for the Union Bank of Australia for 6 years but spent the rest of his career in the tobacco business. He was appointed to the Commonwealth Bank Board in May 1927, replacing J Garvan, whose term expired 10 October 1931. Reading was reappointed to the Board on 13 January 1932 for a term of 7 years, and replaced Gibson as chair from January to October 1934. Reading was then re-elected chairman, a position he retained until the Board was dissolved in August 1945.

Sir Ernest Riddle (1873–1939)
After a career at the Bank of Australasia and in CBA branches, Riddle became Deputy Governor for a 3-year term on 10 October 1925. He was appointed as Governor of the CBA for a term of 5 years from 1 June 1927, then reappointed for a further 7 years from 1 June 1932. He retired from the CBA on 28 February 1938.

Footnotes

¹ The Loan Council, established at the Premiers' Conference in May 1923, was a way of dealing with competition between the states and the Commonwealth in the raising of loans in London by coordinating loan activity.

This information is drawn from records held by the Reserve Bank of Australia and the following external sources:

Butlin M, R Dixon and P Lloyd (2014), ‘Statistical Appendix: Selected Data Series, 1800–2010’, in S Ville and G Withers (eds), The Economic History of Australia, Cambridge University Press, Cambridge, pp 555–594.

Coleman W, S Cornish and A Hagger (2006), ‘The Great Depression and the battle for inflation’ in Giblin's Platoon: The trials and triumph of the economist in Australian public life, ANU Press, Canberra. Available at < http://press-files.anu.edu.au/downloads/press/p55501/mobile/ch06.html >.

Cornish S (2010), The Evolution of Central Banking in Australia, Reserve Bank of Australia, Sydney.

Fitz-Gibbon B and M Gizycki (2001), ‘A History of Last-resort Lending and Other Support for Troubled Financial Institutions in Australia’, RBA Research Discussion Paper No 2001-07.

Giblin LF (1951), The Growth of a Central Bank: The Development of The Commonwealth Bank of Australia, 1924–1945, Melbourne University Press, Melbourne.

Henderson A (2012), ‘Joseph Lyons – Australia’s Depression Prime Minister’, Papers on Parliament No 58.

Markwell DJ (2000), ‘Keynes and the Depression in Australia’, RBA Research Discussion Paper No 2000-04.

National Archives of Australia: Joseph Lyons; C102, Radio Archives master audio tapes, subject classification system, 1933–1971; 1552431, Right Honourable Joseph Aloysius Lyons MP – 1934.

Schedvin CB (1970), Australian and the Great Depression. A Study of Economic Development and Policy in the 1920s and 1930s, Sydney University Press, Sydney.

Steven M (1988), ‘Reading, Sir Claude Hill (1874–1946)’, Australian Dictionary of Biography, Volume 11, Melbourne University Press, Melbourne. Available at < https://adb.anu.edu.au/biography/reading-sir-claude-hill-8167 >.

The Reserve Bank Archives do not have a specific classification of records that deal with the Great Depression. However, there are records that were produced during this time and contain Depression-related information. These records include the London Letters (business correspondence between the Head Office in Sydney and London Office). In particular the London Letter’s S-L-132 to S-L-179 London Letters which include information on the Ottawa Conference (1932) and Melville’s trip to London for the World Economic Conference (1933).

Other records such as board meeting minutes and correspondence files also cover this period. These records are not yet available on Unreserved, but may be accessed by contacting the Archivists.