Economy

By one definition,¹ economic history is the study of economic phenomena from an historical perspective. So it follows that the distinguishing characteristic of such a history is that it will be framed around commercial themes.

A number of economic precepts will serve this purpose. First, there is the economist's distinction between short-run cyclic episodes in the behaviour of the economy and long-term trends. On occasions, the busts of booms and busts are so severe that from the depths of the trough come changes which alter long-term trends. Tasmania is no exception. Because history is about human experience by and large, further themes will concern historical episodes in those markets which count most in determining joy and despair. So the labour market, export markets and the capital market² and public finance are selected for special emphasis.

In spite of this emphasis on economic themes, it is useful to arrange the historical record around particular epochs: Tasmania's transition from prison farm to deregulated colonial economy, its economic existence as a colony, federation, hydro-based development including two world wars and the post industrial era.

There are many explanations of the British government's decision to settle Van Dieman's Land, but the record is incomplete without consideration of commercial imperatives. Although early explorers like Tasman had not mentioned any economic advantages possible in Van Diemen's Land, by the time the British government settled it in 1804, some possible economic gains were evident, particularly from sealing and whaling. The urgency of the argument for settlement was highlighted by the presence of French expeditions in Tasmanian waters.³ At stake was the control of the riches a Tasmanian colony might yield to its owners and exploiters. Beating the French to the spoils had developed into an imperative for the British who already had a continental foothold in New South Wales.

Van Diemen's Land was settled at Sullivan's Cove⁴ in preference to Risdon Cove on the River Derwent, and at Port Dalrymple on the Tamar. Both were military camps, and so these earliest sub-regional economies were command economies in the strictest sense. All rights to property were owned ultimately and entirely by the British government and were not effectively merchantable; all capital infrastructure in the form of roads and bridges was built by a convict labour force, the only workforce in the initial years. The status of the convict workers is a debated issue.⁵

According to Robson,⁶ the government-owned commissariat store was the only outlet for free market exchanges between government officials, who were allowed freedom of exchange, and a handful of entrepreneurial free settlers. Some of these entrepreneurs developed fortunes and invested these in the island's prime agricultural lands. A system of barter exchange prevailed because the British government, following the approach adopted in New South Wales, did not impose a monetary constitution on the local inhabitants, allowing the monetary system to evolve.⁷

Van Diemen's Land's emergence from its primordial state was ignited by the arrival of a steady flow of free settlers and the subsequent establishment of private markets. The other ingredient which caused the Van Diemen's Land economy to sprint out of the blocks was the increasing number of freed convicts able to cultivate the island's agricultural land. Hartwell points to the bewildering mix of land grants, acquisitions and leases creating confusion about ownership and property rights which ultimately forced the government to promulgate the Rippon regulations (1831) which replaced land grants with land sales.⁸

The fertile soils of Van Diemen's Land turned out to be eminently suited to the production of two staple crops: wheat and wool. Wheat, grown largely in the south-eastern corner, came to dominate the intercolonial market for flour, while the lush northern midlands plains produced high quality wool which was exported to the English mills at a transport cost advantage in comparison with European sources. The growth of the Van Diemen's Land economy from 1820 to 1850 was rapid, largely explained by intercolonial wheat sales and international wool exports. By 1850, two-thirds of the 70,000 population were either emancipated convicts or free settlers, and 4.25 million acres of land had been distributed for agricultural purposes. This agricultural core of the economy included 1.75 million sheep and 80,000 cattle. In less than four decades, the economy had made the transition from prison farm to a vibrant, comparatively free market, colonial economy. However, the limitation of its economic prospects remained, namely, a significant shortage of financial and physical capital.

The maturing nature of the Van Diemen's Land economy was exemplified by its capacity to withstand the cold winds of deep recession in the early 1840s, largely generated by diseases among the sheep population and the growing competitiveness of wheat supplies from elsewhere. This recession did impact on one long-term trend, namely transportation. The continuation of the transportation of convict labour when unemployment was rife among free settlers was one of the issues which called into question the sense of the transportation process. Transportation ceased in 1853. The economy was about to enter a new phase.

By the 1850s, the Van Diemen's Land economy was in fine fettle and its transition had been quite spectacular. Many new settlers were attracted by these economic successes. Van Diemen's Land became Tasmania in 1856 and a bicameral legislature was established as Britain loosened some of its previously rigid controls. These buoyant conditions were fuelled partly by the Victorian gold rush and partly by the arrival of new settlers, largely from Britain, many of whom according to Fenton preferred Tasmania's gentler climate to the harsher, mainland climates.⁹

The sanguine expectations of the 1850s gave way to more realistic expectations in the 1860s, caused by the declining status of the two staples which had explained the rapid transition from command to free economy in the first half of the nineteenth century. Tasmania's status as a leading wheat-growing region was challenged by larger-scale, more efficient production of harder wheat varieties in New South Wales, South Australia and Victoria. Further, the small-scale inefficiency of local production led to the decline of Tasmanian wheat exports from half the total Australia output in the 1840s to a negligible proportion. No doubt, the decline of Tasmania's intercolonial wheat trade affected the amplitude and deviation of the downswing in the 1860s. The second staple, fine wool, also experienced a temporary sharp decline in value as the size of the wool clip was affected by the disease known as scab. The 1860s were also characterised by a significant outmigration of the younger population to the mainland, reducing the overall rate of population growth, and setting a pattern which is currently evident.

The Tasmanian economy was clearly in need of an injection of government funding, although the narrow nature of the island's tax base required a financial source beyond the small amount these taxes provided. Tasmania's colonial budgets were always constrained by the narrowness of the tax base, a problem exacerbated by the intransigence of members of the Legislative Council who stubbornly voted down government-sponsored legislation designed to introduce new forms of taxation. The comparatively well-to-do, landed gentry controlling Tasmania's upper house steadfastly refused to introduce taxes which might have impinged on their own wealth. They were assisted by the financial powers vested in the Legislative Council, in particular the power to reject the government's money bills. The Tasmanian government was hamstrung in its attempts to improve the lot of many Tasmanians, and little assistance could be expected from a cash-strapped private financial market characterised by bank closures, and credit rationing by those still operating.¹⁰

The 1870s recovery was generated by mineral exploration and the development of a mineral export industry. The west coast became the focus of Tasmania's mining industry when a mountain of tin was discovered by James (Philosopher) Smith¹¹ at Mt Bischoff in 1871. This was followed by the discovery of silver-lead ore deposits in the Zeehan-Dundas region in 1882, and the Iron Blow at Mt Lyell a year later. The Mt Lyell copper mining company became a core component of a burgeoning mineral export industry which remains a major contributor to the value of Tasmanian exports. Although the discovery of coal in the north-east and gold at Beaconsfield diversified the island's mineral resource base, the centre of the mining industry was located on the west coast.

This new-found form of export-generated wealth opened the tiny Tasmanian economy to the vicissitudes of the world's resources price cycles. A downturn in world mineral prices was bound to impinge on Tasmanian living standards. The first event of this kind was the 1890s Depression, when falling mineral prices reduced exports and each of the Australian colonies felt the cold winds of severe recession. The colonial banking system, which had grown like topsy in a relatively unregulated environment, was shaken by many bank failures in the mainland colonies. In Tasmania, a flagship institution, the Van Diemen's Land Bank, folded, bringing down a number of key industries dependent upon it. Again, the Tasmanian government of the time was cash-strapped and hamstrung by an intransigent Legislative Council which refused to pass new taxes. A series of Tasmanian governments were constrained by the parlous state of the Treasury coffers, and, exercising the only option available to them in the absence of any viable tax initiatives, they tended to amass large public sector deficits. The lot of Tasmanian workers was a sad one indeed. Unemployment rose sharply in the 1890s, there was no effective social welfare safety net, and those who could find work did so at depressed wage levels. This combination of unfortunate events led to a period of comparative poverty in Tasmania.

The upside of both the 1860s and 1890s depressions was the impetus these gave to the federation movement.¹² The smaller colonies in particular were particularly disadvantaged by the prevailing system of intercolonial tariffs, while Tasmania's island isolation and its narrow tax base emphasised to the doubters the advantages of a federation with other Australian colonies.

Economic recovery was caused by an improvement of the same mineral prices which had collapsed to plunge the world economy into the 1890s Depression. The west coast mining towns boomed and their population grew from practically nothing to 25,000.¹³ The west coast became Tasmania's version of the wild west, given the behaviour of its pioneering inhabitants and free spirits active generally. The mineral boom brought a vibrant trade union movement and ultimately the establishment of institutions which protected workers' welfare, not least the Tasmanian Wages Board, established in 1911.

The virtues of hydro-based power systems were illuminated with the distribution of electric light to parts of Launceston, produced by water-driven power turbines. Launceston became the first southern hemisphere city illuminated by electricity, and so began Tasmania's hydro-based development. The privately-owned Hydro-Electric and Metallurgical Company soon found itself short of capital for the development of a hydro power system at Great Lake, and by 1914 this private company was nationalised: a tad ironic in the context of the 1998 debate about the privatisation of Tasmania's Hydro-Electric Commission. Tasmania's mining and industrial elite could easily perceive the virtues of connecting their mines and industries to water turbine-generated energy sources. The Waddamana and Great Lake schemes completed in 1916 not only energised Hobart's trams, but also the Mt Lyell copper mine. A new industrial development strategy emerged. In essence it consisted of building new hydro dams to power individual industries, and in time a particular pattern developed. Individual industries were paired with particular hydro schemes, although the new schemes were built with extra capacity to supply new industrial entrants potentially attracted by the prospect of cheap energy. The policy was successful in attracting industries such as Electrolytic Zinc (1916), Cadburys (1920), Kelsall and Kemp (1920), Patons and Baldwins (1922), Australian Newsprint Mills (1930s) , Associated Pulp and Paper Manufacturers (1936) Comalco (1955), Temco (1960s). Their energy demads absorbed about 70 percent of the island's energy grid. These industries developed as the export core of the Tasmanian economy in modern times, and accounted for 65 percent of the value of all exports in 2002–03, the other major export commodities being processed foods and fine merino wool.

The First World War boosted the demand for Tasmanian mineral exports, in particular copper, but the post-war era was not particularly propitious for Tasmania's welfare. The mining boom had faded and the commercial viability of some industries dependent upon it also diminished. Globally, agricultural commodity prices declined, casting a pall over global welfare. Unemployment rose as returned servicemen experienced difficulty in finding jobs. The only bright spot was the boost given to investment through the establishment of the Cadbury factory at Claremont, Electrolytic Zinc at Risdon, and textile manufacturers Kelsall and Kemp, and Patons and Baldwin at Launceston. Despite these new industries unemployment ranged between 9 and 13 percent of the workforce throughout the 1920s, and Tasmania was ill prepared for the events to follow.

The winds of global depression hit Tasmania in 1930 when export prices halved¹⁴ and ultimately the official unemployment rate reached 30 percent. A completely wrong-headed Premiers' Plan was devised in 1931 and possibly deepened the Depression. The premiers slashed spending when Keynes¹⁵ was advocating increases. The plan also involved an increase in taxes and interest rates when a stimulus required reductions of both. Sanity returned when the Commonwealth Grants Commission ^CGC was formed in 1933 to administer claims for financial assistance from the claimant states. These were invariably Tasmania and South Australia and occasionally Western Australia. The CGC became a pivotal institution when it assumed the role of distributing grants to the states and territories from the Commonwealth's uniform income taxation collections pool.¹⁶ The CGC's guiding principle was fiscal equalisation between the states, based on living standards prevailing in the standard states (New South Wales and Victoria). The CGC relativities between the states became the basis for determining these untied grants to individual states/territories, taking into account certain disability factors they experienced. The CGC survives today and distributes the commonwealth-collected GST proceeds to states and territories on the same principal of fiscal equalisation.

The Australian economy and with it all state economies recovered in 1937–38. Tasmania's recovery was sparked by international rearmament, reflected in a 15 percent increase in mineral export earnings. The Second World War returned Tasmania to its central command economy roots, and the operation of market economies was suspended. Price controls were established, and the economic pie was divided between the demands on resources to support the war effort, while families were forced to contend with ration books.

The immediate post-war period in Tasmania saw the arrival of many displaced European families, particularly Poles, Germans and those from the Baltic States. Many augmented Tasmania's dam construction workforce, making a well-recognised contribution to the construction of Tasmania's remaining hydro energy grid. Tungatinah and Trevallyn power stations opened in 1955 followed by Liapootah (1960), Catagunya (1962), the Repulse Dam (1988) and Mersey Forth Schemes (1969). New industries opened, for example, Comalco's aluminium plant at Bell Bay and a Wesley Vale paper plant. The premier, Eric Reece, was feted as ‘Electric Eric', managing a booming state economy. The period 1965 to the early 1970s was Tasmania's golden age, dominated by manufacturing exports.

The portents for the continuation of this golden hydro development era were not so favourable by the end of the 1970s. Sir Bede Callaghan¹⁷ was the first analyst to herald the ultimate demise of hydro-based development. Tasmania's cheap power advantage had dissipated by 1977 and the energy grid offered to potentially large industries contained only one option: hydro power. Other Australian states were able to offer a cocktail of natural gas and carbon fuels. By the end of the 1970s, Tasmania could not expect to attract new industries on the old basis of cheap and diversified energy. Environmental costs were also increasing as further hydro developments impinged on sensitive areas. One icon had already disappeared when Lake Pedder was flooded in 1972, creating the stimulus for the creation of a Green political party in Tasmania.

The Gray government's plan to construct the Gordon-below-Franklin power system would have resulted in the loss of the Franklin, the last Tasmanian wild river in a natural state. This was one occasion on which the environmental concerns about the project and its economic viability coalesced. The economics are summed up in the following: the borrowings needed to build the Gordon-below-Franklin promised to increase the Hydro-Electric Commission's borrowings by 25 percent but to add only 14 percent to energy capacity. The decision by the High Court of Australia to forgo construction is consistent with this simple test of the public interest in the matter. The Tasmanian government was paid $500 million by way of compensation.¹⁸

Federal governments of opposite political status to state governments are prone to take back in different forms what they have given the states. Dam compensation monies were offset by substantial reductions in Tasmania's relative funding. Tasmania's share of commonwealth funding fell from 4.85 percent to 3.85 percent in 1988–89, and then to 3.2 percent,¹⁹ leaving a $250 million hole in the budget. This added to the burgeoning level of public sector indebtedness prevailing throughout the 1980s. The remaining factors were rising interest rates, which blew out the state's liability to service debt on its annual budget, and relatively high levels of public sector indebtedness.

Premier Field in the early days of the Labour–Green accord in 1989 recognised the significance of Tasmania's debt problem and travelled the state to explain the parlous nature of the state's finances. The support of the unions was garnered²⁰ and a debt reduction strategy was applied by Field and continued by the Groom and Rundle Liberal governments. The final accolade for the success of this fiscal constraint was Moody's upgrading of Tasmania's debt script from AA2 to AA1, commensurate with the majority of the Australian states.²¹ This financial achievement was an outstanding plus for Field in light of the circumstances: a government held in place by the Green independents who were bound to secure environmental improvements from the government. These the Greens gained, in an era which was politically volatile.²² Michael Field and the Labor Party were obliterated at the 1992 election, a most undeserved fate.

The urgency of finding a new basis for economic development fell to Robin Gray's Liberal government, which was at first driven by a talent-laden ministry. Its early years were most impressive as Gray recast the development mould to focus on small to medium size businesses. The manifestation of this policy redirection was the creation of the Tasmanian Development Authority led by an entrepreneurial head (Phillip Chandler). Several new industries benefited from TDA support, notably the International Catamaran (INCAT) organisation. Gray reached the top echelon of Tasmanian premiers as a champion of development, beside names such as Ogilvie, Reece and Cosgrove.

The 1990–92 recession hit Tasmania harder than most states and Tasmania simply lagged behind the recovery phase. Unemployment drifted 25 percentage points above the national average and wage earnings fell 20 percent short of composite national averages. A further environmental debate about forest management practices emerged. Failure to resolve this terminated the formal Labour­–Green accord and led to the Regional Forest Agreement between Commonwealth and Tasmanian governments in 1995. Green interests have not fully embraced the terms of an agreement which was designed to remove sovereign risks confronting the industry. The debate about forest management practices continues.

The 1998 Tasmanian election campaign was fought over the privatisation of the Hydro-Electric Commission, and Jim Bacon's Labor government was elected on a commitment never to privatise it. The Bacon era was characterised by almost unprecedented economic growth, Tasmania topping the state growth table in 2002–03 on the back of tourism and housing booms. It was almost as if Tasmania had been rediscovered as a preferred and beautiful location. Sadly, Jim Bacon succumbed to illness, snuffing out a potentially great premiership, and the loss too of David Crean's financial expertise could hinder the continuation of the Tasmanian recovery, although this current boom may elevate the economy to the status of sustained improvement.

Bruce Felmingham

Footnotes:
1. JR Winton, A dictionary of economic terms, revised edition, New York: Routledge and Kegan Paul, 1951, p 30.
2. The inclusion of the capital market is not immediately obvious but capital is included because it is always scarce in a Tasmanian context.
3. RW Giblin, The early history of Tasmania, London: Methuen, 1928, chapter XIV, lays stress on the importance of Captain Baudin's 1800–03 expedition in fomenting British anxieties about French intention. He quotes(p 223) from a letter written by Matthew Flinders to Joseph Banks: ‘The French are gaining time on us'.
4. Collins thought that Sullivan's Cove was a superior location to Risdon Cove, originally settled by Lieutenant Bowen.
5. K Dallas, ‘The first settlement in Australia related to sea power in world politics', G Blainey, ‘The tyranny of distance' and Manning Clark, ‘The Choice of Botany Bay', in G Martin ^ed, The founding of Australia, Sydney: Hale and Ironmonger, 1978. Dallas and Blainey argue that convict labour was always scarce while Manning Clark writes about ‘the evils of overcrowded gaols' and the colonies being a suitable location for alleviating overcrowding. In his own chapter, Ged Martin comes out in favour of the Dallas/Blainey view.
6. LL Robson, The Tasmanian story, Oxford: Oxford University Press, 1987, p 8.
7. B Felmingham, ‘Money and banking', in I McFarlane, R Hassan and S Dowrick (eds) , Cambridge handbook of the Social Sciences in Australia, Melbourne: Cambridge University Press, 2003. According to Felmingham, this created an era of free colonial banking and bank failures in the 1890s.
8. RM Hartwell, The economic development of Van Dieman's Land 1820–1850, Melbourne: Melbourne University Press, 1954, p 32.
9. J Fenton, A history of Tasmania, Hobart: J Walch and Sons, 1884, p 269.
10. Hartwell indicates that banking companies closed in the decade 1860–69, p 171.
11. Philosopher Smith's exploits in his quest for mineral riches are documented by James Fenton, A history of Tasmania, Hobart: J Walch and Sons, 1884, chapter XIX.
12. WA Townsley, Tasmania from colony to statehood 1803–1945, Hobart: St David's Park Publishing, 1991, p 100. Townsley suggests that the 1860s recession was most severe in Tasmania and convinced those who doubted it before, that Tasmania was too small to continue playing the intercolonial game.
13. Robson, p 45.
14. Australian Bureau of Statistics (ABS no 1306.0) Tasmanian Year Book 1988, p 2.
15. JM Keynes, A treatise on Money, London: Macmillan, 1928.
16. Uniform income tax was implemented in 1942.
17. Sir Bede Callaghan, ‘An inquiry into the structure of industry and employment in Tasmania', Canberra: Australian Government Press, 1977, p 114.
18. The economic outcomes of Dam Compensation are analysed in R Rutherford and M Trethewey, Dam compensation and the Tasmanian economy, Hobart: School of Economics, University of Tasmania, 1984.
19. B Felmingham, I Morris, and R Rutherford, ‘Tasmania', in Evatt Foundation, State of siege, Sydney: Federation Press, 1989, table 15–18, p 437.
20. B Felmingham and C Attwater, ‘An Iidependent assessment of the State's financial position', prepared for the TPSA and TTLC, Hobart, 1990, p 87.
21. Moodys is a major international rating agency. Moodys advise potential investors about the risks of investing in particular government paper.
22. Marcus Haward and Peter Larmour, The Tasmanian parliamentary accord and public policy, 1989–92, Canberra: Federalism Research Centre, 1993.