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– The 100th Anniversary of the ANZAC landings is approaching.

– The focus is very rightly on the sacrifices made.

– But Gallipoli and the broader conflict also shaped the Australian economy and financial markets.

The 100th anniversary of the ANZAC landings is rapidly approaching. And the focus is very rightly on the sacrifices made by those involved. Much has been made of how the ANZAC spirit shaped the Australian identity. But Gallipoli and the broader conflict also shaped the Australian economy and financial markets.

The most immediate impact of the war on the Australian economy was the disruption to international trade. The slump in exports was shortlived as the war effort geared up. But the weakness in imports persisted for the duration. Imports of manufactured items were particularly hard hit.

The need to replace imported goods gave a significant boost to Australian manufacturing. The steel industry and chemicals are key examples. Production of iron ore rose by 150% during the war years. And crude steel production jumped by 1,200%. The value of chemical production lifted by 88%. Companies that now dominate the business landscape such as BHP rode the wave.

The difficulties of trading with Europe saw a re-orientation of Australia’s trade towards Asia. About 10% of exports went to Asia pre War. This proportion reached 19% by war’s end. Old trading patterns resumed post War. But this tilt towards Asia provided a taste of things to come.

Isolation provided a form of protection for Australian industry. One outcome was a demand for “protection” to continue. Tariffs pre date WWI. But the Tariff Board was set up in 1921 and the Greene Tariff of that year substantially increased protection. The “infant industry” and “national defence” arguments for protection held sway. While production and employment benefited initially, this policy approach did contribute to weak productivity outcomes and some of the structural impediments that the economy is still working through.

Australia’s strong focus on immigration is allied to the defence theme. Immigration virtually ceased during the War years. But the Federal government vigorously promoted migration to Australia when the War finished. Assistance schemes were put in place. These schemes were mainly targeted at British migrants. But interest from Italy and Greece picked up and Australia took the first steps down the multicultural path.

Agriculture was the largest sector within the Australian economy. And the rural sector was required to make a significant contribution to the war effort. Governments responded to war needs by seeking orderly marketing through statutory marketing authorities. The first Australian Wheat Board appeared at this time. When policy makers sought to unwind some of these arrangements after the War they found strong support for maintaining formal marketing arrangements backed up by government legislation. As they evolved, many of these schemes came to adversely affect the efficiency of resource use.

Wars are expensive – in treasure as well as lives. And paying for the War wrought some significant changes in fiscal policy and financial markets. Public debt rose from 75% of GDP in 1913 to 123% by 1918. Today’s budget deficits and debt burdens look modest by comparison.

Capital markets in London were difficult to access. And the Government financed the war effort through a series of loans from the public. The War Loan Bonds and the Peace Bonds administered by the Commonwealth Bank were a significant step in the formation of Australian capital markets. These activities and the other demands of a war time economy contributed to the Commonwealth Bank taking on the responsibilities of a central bank. The Reserve Bank of Australia evolved from these central banking activities. The RBA’s success in promoting financial stability and economic activity is now a key underpinning of our economic wellbeing.

The Government also paid for the War in other ways, the ramifications of which are with us today. The State governments raised most of the revenue prior to the War, including income tax. Federal revenues were mainly from customs and excise duties. But a number of new taxes were in place by the end of the War. These included a Federal income tax first levied in 1915/16 and a major revenue source today. The increasing reliance on income taxes and increasing centralisation of tax collections dates from that time. The debate about how to share that revenue and the need to reform the taxation system continues today.

Peace is also an expensive business for governments. The desire to build a country fit for heroes had some ramifications that are still playing out. A War Service Homes Scheme providing 45 year loans at favourable rates began in 1918. The long history of government policy to encourage home ownership was underway. And the Australian love affair with housing has been with us ever since. A Soldier Settlement Scheme was set up to create jobs for returned servicemen and open up land to agriculture. A significant investment in infrastructure was required. And while the Scheme struggled to meet its objectives, the infrastructure put in place still provides a significant economic benefit.

A related theme was the acceleration in technological stgelopment that accompanied the War. Few would have imagined in 1914 that Qantas would emerge as a commercial airline in 1920!

One trend that might have amused the larrikin Australian soldier of legend at Gallipoli was the drop in sporting attendance during the war. Crowds at the VFL Grand Final did not reach pre-War levels until 1925!

On a more sombre note the War also required a very necessary and deserved lift in Government spending on social welfare. The dark side of war is only too apparent in the spending on war, service and disability pensions which increased by a factor of 23 in the ten years from 1916. The stgelopment of the modern welfare system was underway.

A broader financial theme was unfolding behind this domestic government finance and financial market story. The US was a net debtor in global capital markets at the start of the War. And a large net creditor by the end. The centre of economic gravity was shifting from Great Britain to the United States. The centre of global financial markets was shifting from London to New York.

The War also influenced economic thought. Politics and economic directions differed sharply. But the central bank focus on controlling inflation that we see today, for example, had its genesis in the hyperinflation that damaged economies such as Germany after the War. Much of the thinking of the great economic minds, such as Keynes, was shaped by their experiences of war and its aftermath.

Lest we forget.

Michael Blythe Chief Economist

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