– 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


The information contained in this report is made available for persons who are sophisticated investors or professional investors (as those terms are defined by section 708(8) or (10) and (11) of the Corporations Act 2001 (Cth)).

Please view our website at www.research.commbank.com.au. The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (“the Bank”) and its subsidiaries, including Commonwealth Securities Limited ABN 60 067 254 300 AFSL 238814 (“CommSec”), Commonwealth Australia Securities LLC, CBA Europe Ltd and Global Markets Research, are domestic or foreign entities or business areas of the Commonwealth Bank Group of Companies(CBGOC). CBGOC and their directors, employees and their representatives are referred to in this Appendix as the “Group”.

Financial markets products have an element of risk. The level of risk varies depending on the product’s specific attributes and how it is used. Potential investors should note that the product discussed in the report may be sophisticated financial products which involve dealing in derivatives. Unless you are familiar with products of this type, this product may not be suitable for you. The Bank will enter into transactions on the understanding that the customer has: made his/her own independent decision to enter into the transaction; determined that the transaction is appropriate; ensured he/she has the knowledge to evaluate and capacity to accept the terms, conditions and risks; and is not relying on any communication from Commonwealth Bank as advice.

In the UK and Europe: This report is made available in the UK and Europe only for persons who are Eligible Counterparties or Professional Clients, and not Retail Clients as defined by Financial Conduct Authority rules. The Commonwealth Bank of Australia and CBA Europe Ltd are both registered in England (No. BR250 and 05687023 respectively).

Commonwealth Bank of Australia: Authorised and regulated by the Australian Prudential Regulation Authority. Authorised by the Prudential Regulation Authority.Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request.

CBA Europe Ltd: Authorised and regulated by the Financial Conduct Authority.

In Singapore: The information in this report is made available only for persons who are Accredited Investors or Expert Investor in terms of the Singapore Securities and Futures Act. It has not been prepared for, and must not be distributed to or replicated in any form, to anyone who is not an Accredited Investor or Expert Investor. If you are an Accredited Investor or Expert Investor as defined in Regulation 2(1) of the Financial Advisers Regulations (“FAR”), the Bank is obliged to disclose to you that in the provision of any financial advisory services to you, we are exempted under Regulations 33, 34 and 35 of the FAR from complying with the business conduct provisions of sections 25 (Obligation to disclose product information to clients), 27 (Recommendations by licensees) and 36 (Disclosure of interests in securities) respectively, of the Financial Advisers Act (“FAA”).

In Japan: This document is made available only for institutional customers. Commonwealth Bank of Australia, Tokyo Branch is a licensed banking business authorized by Japan Financial Services Agency.

In Hong Kong: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.

The provision of this document to any person in the Hong Kong does not constitute an offer of securities to that person or an invitation to that person to acquire, apply, or subscribe, for the issue of, or purchase, securities unless the recipient is a person to whom an offer of securities may be made in Hong Kong without the need for a prospectus under section 2 and the Seventeenth Schedule of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) (“Companies Ordinance”) pursuant to the exemptions for offers in respect of which the minimum consideration payable by any person is not less than HK$500,000 or its equivalent in another currency. Neither this document nor any part of it is, and under no circumstances are they to be construed as, a prospectus (as defined in the Companies Ordinance) or an advertisement of securities in Hong Kong. The products have not been, nor will they be, qualified for sale to the public under applicable Hong Kong securities laws except on a basis that is exempt from the prospectus requirements of those securities laws.

Minimum Investment Amount for Hong Kong Investors: HK$500,000

In Hong Kong for Equities: This document is distributed in Hong Kong by, and is attributed to, Commonwealth Bank of Australia, Hong Kong Branch (“CBAHK”), which is a registered institution with the Hong Kong Monetary Authority to carry out the Type 1 (Dealing in securities) and Type 4 (Advising on securities) regulated activities under the Securities and Futures Ordinance. Investors should understand the risks in investments and that prices do go up as well as down, and in some cases may even become worthless. If you have any queries concerning this document, please contact CBAHK’s registered representative, James Barratt (T. +612 9117 0109 and E. [email protected]).

In the USA for products other than Equities:

The Bank is authorized to maintain a Federal branch by the Office of the Comptroller of the Currency.

This document is made available for informational purposes only. The products described herein are not available to retail investors. NONE OF THE PRODUCTS DESCRIBED ARE DEPOSITS THAT ARE COVERED BY FDIC INSURANCE.

This product is not suitable for investment by counterparties that are not “eligible contract participants” as defined in the U.S. Commodity Exchange Act (“CEA”) and the regulations adopted thereunder; or (ii) entities that have any investors who are not “eligible contract participants.” Each hedge fund or other investment vehicle that purchases the products must be operated by a registered commodity pool operator as defined under the CEA and the regulations adopted thereunder or a person who has qualified as being exempt from such registration requirement. CBA cannot execute swaps with any US person unless our counterparty has adhered to the ISDA Dodd Frank protocol.

This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the “Bank”) and is distributed in the United States by the Bank’s New York Branch and its Houston Loan Production Office. If you would like to speak to someone regarding securities related products, please contact Commonwealth Australia Securities LLC (the “U.S. Broker-Dealer”), a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”) at 1 (212) 336-7737. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Investments and strategies are discussed in this report only in general terms and not with respect to any particular security or securities transaction, and any specific investments may entail significant risks including exchange rate risk, interest rate risk, credit risk and prepayment risk among others. There also may be risks relating to lack of liquidity, volatility of returns and lack of certain valuation and pricing information. International investing entails risks that may be presented by economic uncertainties of foreign countries as well as the risk of currency fluctuations. Investors interested in the strategies or concepts described in this report should consult their tax, legal or other adviser, as appropriate. This report is not intended to provide information on specific securities. The Bank’s New York Branch and its Houston Loan Production Office provides its clients access to various products and services available through the Bank and its affiliates.

In the United States, U.S. brokerage products and services are provided solely by or through the U.S. Broker-Dealer. The U.S. Broker-Dealer is a wholly-owned, but non-guaranteed, subsidiary of the Bank, organized under the laws of the State of Delaware, U.S., with limited liability. The U.S. Broker-Dealer is not authorized to engage in the underwriting of securities and does not make markets or otherwise engage in any trading in the securities of the subject companies described in our research reports.

All Investors:

All investors: Analyst Certification and Disclaimer: Each research analyst, primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the report. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing, and interpreting market information. Directors or employees of the Group may serve or may have served as officers or directors of the subject company of this report. The compensation of analysts who prepared this report is determined exclusively by research management and senior management (not including investment banking).

Unless agreed separately, we do not charge any fees for any information provided in this presentation. You may be charged fees in relation to the financial products or other services the Bank provides, these are set out in the relevant Financial Services Guide (FSG) and relevant Product Disclosure Statements (PDS). Our employees receive a salary and do not receive any commissions or fees. However, they may be eligible for a bonus payment from us based on a number of factors relating to their overall performance during the year. These factors include the level of revenue they generate, meeting client service standards and reaching individual sales portfolio targets. Our employees may also receive benefits such as tickets to sporting and cultural events, corporate promotional merchandise and other similar benefits. If you have a complaint, the Bank’s dispute resolution process can be accessed in Australia on phone number 132221 or internationally 61 2 98417000.

Unless otherwise noted, all data is sourced from Australian Bureau of Statistics material (www.abs.gov.au).