Transforming Australia into an Outward-Looking Economy: Why the 1940s Matter

David Vines is Emeritus Professor of Economics and Emeritus Fellow of Balliol College at the University of Oxford. He is also the Director of the Ethics and Economics Programme at the Oxford Martin School and a Research Fellow of the Centre for Economic Policy Research in London. After a 2018 fellowship with the Minerals Council of Australia, David Vines has brought to light the importance of the Tasmanian trio of economists Lyndhurst Giblin, Douglas Copland, and James Brigden – later joined by Leslie Melville, Nugget Coombs and Trevor Swan – in Australia’s twentieth century trade liberalisation. David Vines discussed all this and as well as its connection to the theories of Maynard Keynes and the Bretton Woods agreement in an address to The Sydney Institute on Monday 25 June 2018.

TRANSFORMING AUSTRALIA INTO AN OUTWARD-LOOKING ECONOMY: WHY THE 1940S MATTER

DAVID VINES

Thank you very much Gerard, and thank you all for welcoming me here. In my talk tonight, I aim to show you how history of economic policy in Australia, especially in the 1940s, had such a strong influence on Australia’s subsequent economic history: it laid the basis for the much later Hawke-Keating reforms. And I will give you some idea of the role of Australia’s first economists in this history. I also want to suggest that what happened was very closely intertwined with what was going on in the rest of the world at the same time.

Let me begin by giving my thanks to the National Library of Australia. That is where I’ve been sitting for the last couple of months, working on the project, which I will be discussing tonight. I am also very grateful to the Minerals Council of Australia, who made my Fellowship at the National Library possible.

First of all, let me say how it was that I have come to be doing this work. I was a student at Melbourne University and I always thought that I would have a career at the Treasury in Canberra, or at the Reserve Bank down the road from here. However, I vividly remember the day, sitting in an undergraduate seminar, when I thought that I needed to go to the other side of the world, and find out how the rest of the world worked, before I began to work in Australia. And so I went to Cambridge. Since then, I have been lucky enough to come back to Australia regularly and see how things work here too. Now, nearly 50 years later, I am here talking about what I have learned on the other side of the world, and how it fits in with the Australian story.

In Cambridge, I was fortunate to carry out research with James Meade, who worked with Maynard Keynes. This is how I came to write about Keynes. It was doing that work on Keynes that made me realise just how important history is for understanding where we are now.

Keynes is mainly known for his General Theory, in which he advocated a macroeconomic policy to bring about full employment. But in my book on Keynes, I argue that Keynes did much more than this. The most crucial thing that he achieved – I think – was the creation a new international monetary system, and the establishment of the International Monetary Fund (IMF) to manage this system. This all happened a conference at Bretton Woods, New Hampshire, in 1944; hence the name “Bretton Woods System” for the new global system. Australia’s earliest economists played a role in influencing what was achieved at Bretton Woods, and in the interpretation of that achievement.

Sadly, Keynes died immediately after the end of the Second World War, soon after the International IMF was set up. As a result, Keynes never got to write the great book that he might have written, explaining the workings of the IMF as, and setting out policy-making rules for the international economy, just as he had done for the national economy in his General Theory.

It was not until 1952 that James Meade published a book explaining how the Bretton Woods system worked, for which he received the Nobel Prize in Economics. However, Meade’s book was formidably complicated. The person who explained Meade’s ideas to the world was Trevor Swan, the foundation Professor of Economics at the Australian National University. This talk is going to be about the way in which Swan, based on his knowledge of Australia’s experience, to set out Meade’s complex ideas in a simple way. Meade wrote a difficult 300-page book, and Swan reduced it all to a two-dimensional diagram.

There will be two parts to my story. The first is about the Australian background: the Australian experience up until the 1920s, during the Great Depression, and then during the World War II. The second part is a description of what Trevor Swan did in bringing together what he had learned from this experience and used it to explain the workings of the Bretton Woods system. In my conclusion, I will talk briefly about the relevance of Swan’s ideas, and the policy based on them, for the Hawke-Keating reforms of the 1980s.

Australia’s story begins with the great nineteenth century golden age, built on exports of wool and gold, during which he country grew into the richest place in the world. That period lasted from the gold discoveries of the 1850s to the great boom of the 1880s. Then came the depression of the 1890s, much more fundamental in its effect on Australia than the Great Depression of the 1930s, and after that came the shock of the First World War. The central feature of the economic system which had developed in Australia by the 1920s was protectionism. Protection from imports enabled firms to produce goods and to sell them at higher prices. Behind protection stood the wage-fixing system in Australia, which was crucial to the whole of Australian life. Protection, which enabled firms to set higher prices, enabled them to pay higher wages. And vice-versa; if the Arbitration Commission increased wages, then firms were able obtain protection from imports, enabling them to pass on higher wage costs in higher prices. The resulting high wages encouraged immigration. In addition, foreign borrowing was used to support the country’s development, including the infrastructure needs associated with immigration. Paul Kelly has called this the “Australian Settlement”.

This settlement was first described in the very famous Brigden Report, whose authors included three of Australia’s very first economists, Lyndhurst Giblin, Douglas Copland, and James Brigden. All three will become key players in my story; all three came to national economic policymaking via Tasmania. Giblin, a Tasmanian, was asked to write a Report on protectionism by Prime Minister Stanley Bruce in 1927, and he was joined by Copland, and by Brigden, after whom the report became known. Giblin had been a student in Cambridge in the 1890s and was wounded three times in the First World War, and after this, from 1919, became Government statistician in Tasmania. Copland was, from 1920, the first Professor of Economics in Hobart, where he worked closely with Giblin; he was by 1927 the first Professor of Economics at Melbourne University. Brigden had also been injured in the War; he replaced Copland as Professor of Economics in Hobart in 1924, and had by 1927 already worked closely with Giblin and Copland.

The Australian settlement was how Australia used economic policy to manage its position in the global economy. The country used protection to redistribute some of the proceeds from its exports of primarily commodities, still mainly wool and gold but also wheat, to those in the rest of the economy. However, beyond this there was no economic policy to speak of. Australia was on the gold standard managed by the Bank of England in London and banking policy was managed by the Commonwealth Bank and other banks in Australia. This system was terribly exposed internationally. When exports were buoyant there were more deposits made by exporters into the Australian banks in London, and these banks then did more lending in Australia, creating a boom. But when exports fell it was the opposite: fewer deposits from export revenue, and less lending in Australia. The Commonwealth Bank – which was Australia’s Central Bank – did not run an independent monetary policy of any kind.

When the Great Depression came the price of wool collapsed in world markets – it more than halved – and the price of wheat fell drastically too. Less lending by banks in Australia meant that the Global Depression spread outward from farms into the rest of the Australian economy. But there was more to this spread than an effect coming from bank lending.

Giblin, Copland, Brigden were at the centre of an understanding what happened. To them we can add another – Leslie Melville. At a very young age Melville had become the first Professor at of Economics at Adelaide University and then, in 1930, the Chief Economist at the Commonwealth Bank. These four economists had an extraordinarily clear idea of the processes unleashed in Australia during the Great Depression. Giblin had been brought to Melbourne University by Copland to join him there as the first Ritchie Research Professor of Economics, and he explained the key ideas very clearly, in his Inaugural Lecture given in 1930. When farm income collapses, spending by farmers will fall, and the rest of the economy will suffer. How much? Well, a reduction in farm income of say £1,000 will – they supposed – cause farmers to reduce their spending by the same amount. But around a third of their spending goes on imports, and so the spending by farmers in the domestic economy will fall by only two thirds of what they had suffered in the first place. That reduction of spending by farmers will cause income in the cities to fall, and so cause a further equal reduction of spending by those in the cities, only two thirds of which will impinge on the domestic economy because one third will – again – leak out into a reduction in imports. This – they argued – is a geometric progression, and the process will accumulate, with one third of the reduction dropping out at each stage, until the outcome is a fall in spending of £2000 added on to the initial £1000 drop in export income. This is a “multiplier” story. It appeared six years before Keynes made this idea famous in his General Theory.

This group of four economists wished to “share the burden” caused by the reduction in export revenue. They faced, already, the implementation of a disastrous policy, a policy of wage cuts and price deflation, a policy which was one to go on to break the Labor government of James Scullin. Their crucial understanding was that Australia needed to be able to leave the gold standard. Instead of remaining tied to gold and relying only on wage cuts – they argued – it was best also to devalue the currency. Such a devaluation would help to protect the farmers, since it would mean that their exports abroad yielded them more domestic currency, making up for some of the fall in export prices, meaning that their spending would not fall by so much. It would also protect the position of those who competed with imports. That is how a policy of devaluation would enable the burden of falling export prices to be shared around the economy. Some orthodox economists argued at the time that devaluation would be inflationary. The group of four economists argued that this was not the case since there had already been cuts in wages; it was possible – they argued – to aim for a mixture of devaluation and wage cuts which would cause neither inflation and wage cuts.

The Australian economy began its recovery from the Depression more rapidly than elsewhere, partly due to the advice which these economists gave, advice which influenced the policies adopted by Prime Minister Joseph Lyons.

Although currency depreciation was a central part of what these economists recommended, they were still not quite sure how to bring it about. Writing in 1934, Melville still favoured keeping the gold standard as an international monetary system. However, he registered a proviso – countries like Australia had to be able to devalue their currencies as and when they needed to do so. But such a possibility was not present until it arrived in the Bretton Woods system more than ten years later.

There was an Imperial Conference held in Ottawa in 1932. In the National Library files, the there is a wonderful account of the proposals which this group of Australian economists produced for the conference; much clearer than anything else tabled at that Conference. At the same time, the conference reinforced protectionism throughout the Empire. As those at the Conference effectively said: first protect at home, then protect the empire, and then – more or less – to hell with everybody else.

By the middle of the 1930s this group of four economists – Gilblin, Copland, Brigden and Melville – had established a unique understanding of international macroeconomics, ahead of anything understood elsewhere else in the world at the time. Copland had been invited to give the Marshall Lectures in Cambridge in 1934 at which he explained these ideas. Crucial to their story was, of course, Keynes’ General Theory, published in 1936. “Nugget” Coombs, in his autobiography, describes the publication of Keynes’s book as by far the most important intellectual event of his lifetime. But for the four economists whom I am describing it clarified and formalised the ideas which they already had about what had gone wrong in Australia when there had been a collapse in export revenue. Also crucial to their overall understanding was a sense of how to manage the currency in order to promote economic recovery, something which Keynes had not even begun to discuss.

Then came the Second World War. This had a dramatic effect on the activities of economists that I have been talking about. They were joined by Roland Wilson, yet another economist from Tasmania, who had been a student of Copland and Brigden.  Wilson had gone first to Oxford to write a DPhil and then to Chicago, to write another PhD, producing what became very famous work on understanding the effects of international capital flows. By the age of 32 (in 1936) had already become Commonwealth Statistician. As war approached, Wilson persuaded Prime Minister Lyons to establish a Finance and Economic Committee to examine the economic policy that would be needed during wartime.

It was Wilson who brought Nugget Coombs into the group who formed the Finance and Economic Committee. Coombs was then even younger, only in his early 30s. He had studied for a PhD at the LSE in the early 1930s and had then been brought into the Commonwealth Bank by Melville; he was to go on a few years later to become Director of the Department of Postwar Reconstruction, and will play a significant part in the story that follows.

The first issue the Finance and Economic (F and E) Committee were asked to assess was how to pay for the war. Wartime economic policy was then being managed by Prime Minister John Curtin and his Treasurer Ben Chifley. The F and E Committee resisted the orthodox pre-Keynesian idea that taxes needed to be raised to pay for the war. Why? Because there were people still unemployed from the depression of the 1930s who could be brought into work, making use of a multiplier process coming from the increase in spending. However, as full employment was approached – because of the extra demand coming from the greatly increased war expenditure – they understood the need to raise taxes, in order to prevent excess demand and inflation, of the kind which had arisen during the World War I.

Central to the work I have been doing in the National Library and the National Archives is a discussion between Giblin and Keynes, on how to pay for the war. Gilblin had known Keynes since the end of World War I, and had just come back from a period of sabbatical leave as a Fellow at King’s College, which meant that he came to know Keynes well. One can see that Giblin was not yet sure how to apply multiplier ideas to thinking about the effects of increasing demand brought about by the war. He was still bound up by pre-Keynesian thinking in terms of the quantity theory of money. There is a wonderfully clear letter from Keynes to Giblin saying, “We’ve added up the numbers this way in Britain; I suggest you do the same.”

The Japanese bombing of Pearl Harbor brought America into the Pacific War, and soon led to the fall of Singapore. The need to defend Australia soon became the central task for Prime Minister Curtin. However, very soon Curtin – and his Treasurer Chifley – became committed to the task of Postwar Reconstruction. The reason for this was that they were determined to ensure that there not be unemployment and social collapse after the war as had happened after World War I. They wanted to create opportunities for a new future.

The Finance and Economic Committee became central to thinking about Postwar Reconstruction in the domestic economy. However, they soon faced a key international problem. How to pay for the war was not just a domestic issue about tax and expenditure policy. Thanks to the US, how to pay for the war had become an international question about what to do when the war was over.

This had happened first in the UK. The Lend Lease agreement between the US and Britain had been brought into being in 1941 to provide finance for Britain, as Britain and the Empire fought the war against Germany. But what was Lend Lease, Congress had asked Roosevelt? A grant? No. A loan? No. Will they pay interest? No. What is it? Roosevelt asked the State Department to find an answer and the answer, roughly speaking, was to make it a purpose of US policy to bring about the end of the British Empire.

The United Kingdom was required to sign on the dotted line. The crucial words in the Lend Lease Treaty were that the UK promise not discriminate against the importation of products from in any country. When Keynes saw this, he said to Assistant Secretary of State Dean Acheson “does this mean the Empire?” Does it mean ending the Imperial Preference which had been agreed at the Imperial Conference in Ottawa in 1932? Acheson’s answer was yes. The central question which Keynes faced was – was what to do when this obligation was imposed on Britain.

How to manage a world in which Britain – because of the Lend Lease Treaty – would be forced to liberalise its trade by the US?  This was what led Keynes to start working towards the new international monetary system that would be established at Bretton Woods.

The Australian response to these circumstances is a remarkable story. When the fall of Singapore happened, and the US entered the war, Australia was required to sign exactly the same kind of clause in a Lend Lease Agreement with the US that the UK had been required to sign. This would mean giving up the preferences which Australia had obtained in the sale of its goods to British markets. The response of the Australian economists was that Australia could possibly adapt to these requirements, but only providing that other countries in the world, and especially the US, were committed to very different economic policies very different from those which had led to such a disaster after World War I.

The first thing that the Australian economists, in the discussions about forming the IMF, was an explicit commitment by all countries joining the IMF to a policy of full employment. Such a commitment was central to their ideas about post war reconstruction in Australia. Only on such a world would markets for Australia’s goods grow, in the US and elsewhere, to replace those which Australia might lose in the UK. Therefore the Australian economists insisted that those joining the IMF actually should be required to formally commit to policies of full employment, and they insisted that such a commitment be explicitly required in the Articles of Association of the IMF. Keynes and many others told our group of Australian economists that the US would never formally agree to this. But for them it was central. Nugget Coombs is famous for writing Full Employment in Australia – a White Paper – in 1945, by which time he had been Head of the Department of Postwar Reconstruction for two years. What is less widely known is that he had spent much of the previous two years urging policymakers from other countries, and principally the US, that they commit to adopting such full employment policies. Roland Wilson and Leslie Melville also played a key role in efforts at persuasion along these lines at international meetings.

The second thing the Australians were determined to do was to put additional pressure on the US to spend more after the war, because they were worried that the US would be in balance of trade surplus. One country in surplus must mean other countries in deficit, so pressure of this kind – they rightly thought – was necessary. And the third thing that they added was that the operating rules of the IMF should provide freedom for countries to devalue their exchange rates when needed, as Australia had done in the 1930s. This was resisted, again by the US, in the international discussions that led up to the Bretton Woods meetings.

Nugget Coombs had the idea that the Australian approach be called the “positive approach”. Australia’s proposals about an inserting an explicit requirement for full employment policies into the IMF’s Articles of Association were thought by many to be negative, because they were making it more difficult to reach agreement with the US in the negotiations which led up to the Bretton Woods meeting. Coombs suggested turning this around and to saying “we’re advocating something positive”: a commitment to a policy a full employment policy which all thinking people in the world, not just in Australia, would think to the right policy after the war has been won, bearing in mind the memories of the Great Depression.

Ultimately, this “positive approach”, did not succeed. The US, as argued by Keynes and others, would not agree to an explicit commitment to full employment. So, at the Bretton Woods meeting, when the IMF was established, there was no such explicit commitment. Australia was reluctant to join. Many in Australia, especially Jack Lang, and his followers like Eddie Ward and others on the left of Australian politics, thought that what was actually happening at the Bretton Woods meeting was a recreation of a deflationary gold standard. But others, including most of those at the conference, believed that they were establishing a system that could be made to work, and Australia did eventually join the IMF, although not until 1946.

In fact, full employment was achieved, world-wide, in the great post war golden age – golden in the sense of being a period of unprecedented economic growth. In part this was because it became known that policy in all countries would be geared to ensuring that the world did not slip back into depression after the War.

But how, alongside this, would the Bretton Woods ensure that countries achieve a satisfactory balance of payments at the same time that they achieved full employment? This was not ever made entirely clear, either at the Bretton Woods meetings or in the years which followed. It was up to James Meade in 1952, and then to Trevor Swan, with the diagram which he produced in 1955, to make clear what had actually been put in place.

Trevor Swan is the last person to enter my story. He was a star pupil at the University of Sydney, graduating in 1940 as the first part-time university student ever to win a University Medal. An astonishing achievement soon followed: by 1943 Swan had built a pioneering econometric model of the Australian economy and had used it in order to show how Australia could have avoided the Great Depression. His exercises with his model showed that, following the plunge in export revenue, a devaluation of the currency could have been used to prevent economic activity from collapsing – precisely the policy which Giblin, Copland, Brigden and Melville had been advocating. The model suggested empirically that a very large depreciation would have been needed, more than fifty per cent! His model also showed empirically that, if the policy response had been a smaller depreciation, assisted partly by a policy of fiscal expansion, then this would have still avoided the collapse in activity, but would have done so in a way which did not correct the worsening in the balance of payments caused by the fall in export revenue. This is something which he later showed using his diagram. Swan’s work on his econometric model was an essential preliminary to his later work on the Swan diagram.

From 1946 onwards, Swan was the chief economist in the Department of Post-War Reconstruction. By 1949, he had become the chief economist in the Department of the Prime Minster, before moving, in 1950, to become Professor of Economics at the ANU. In the National Library there is a wonderful series of papers detailing discussions which Swan had with Roland Wilson, who has also been important in my story, about macroeconomic policy in Australia in the late 1940s and early 1950s. These discussions too were a preliminary to his work on the Swan diagram.

Let me go back to Roland Wilson. As already noted, at the age of 32, he had become the chief Commonwealth Statistician; in a world where there were no economists in government, this meant he was already then the chief economic advisor to the government. At the beginning of the War he became head of the Department of Labour and National Service. During the war, he was central to the work of the Finance and Economic Committee, and involved in the international discussions of the positive approach to economic policy discussed above. By early 1951, he was the Permanent Secretary of the Treasury, the first economist to hold that position.

By this time Swan had just moved to the ANU, from his position as Chief Economist in the Prime Minister’s Department. In their discussions of Australia’s economic policy position in the late 1940s and early 1950s, both of Wilson and Swan had very significant concerns. What to do in the post war world in which there was a very large immigration program and – as a result – a very rapidly growing demand for infrastructure and investment, leading to an excess demand for goods and services? Their concerns were that inflation should be prevented from taking off, and that the balance of payments should not become vulnerable to collapse, as it had happened in the late 1920s and early 1930s.

There are three typed papers in the Swan files in the National Library which explore this issue, and there are also responses by Wilson in his papers in the Library. These papers extend over a period of two or three years. And then – at last – there is a typed note by Swan, written in 1952, which brings everything together. As Swan says at the beginning of his note, “some algebra will help”. He provides what is necessary in eight clear pages.

The question is how to achieve full employment and a satisfactory external position in an economy at the same time. Swan’s answer: by manipulating fiscal policy, and by manipulating the competitiveness of domestic producers relative to foreign producers. (As experience of the 1930s had shown, this competitiveness can be increased either by having the Arbitration Commission cut the wage rate in Australia, or by devaluing the Australian currency). This means that there are just two targets – full employment (internal balance) and a satisfactory balance of payments position (external balance) – and just two instruments – fiscal policy and competitiveness. Swan’s extraordinary achievement was to reduce this problem to a two-dimensional diagram, creating something in a simple picture that Meade, had spent 300 pages explaining not terribly clearly.

Swan’s diagram is very simple indeed, containing just two lines. It can be explained in a straightforward manner. The two objectives are full employment (internal balance) and a satisfactory balance of payments position (external balance). The internal balance line shows that full employment can be achieved in a number of ways: high competitiveness means that fiscal expenditure must be low enough to ensure that there is not over-full employment, whereas lower competitiveness means that fiscal expenditure can be higher without causing over-full employment. So the internal balance line is upward sloping. The external balance line shows that a satisfactory balance of payments can be achieved in a number of ways: high competitiveness means that fiscal expenditure can be high without leading to a balance of payments deficit, whereas lower competitiveness means that fiscal expenditure needs to be lower so as to not cause a balance of payments deficit. So the external balance line is downward sloping. Internal and external balance exists where the two lines cross. That is what the diagram tells us.

If circumstances change the position of the lines in the diagram shift, showing that a policy change is needed. The diagram can be used to show this. It shows that if export prices fall then both lines shift up; the diagram shows that that an improvement in competitiveness is needed to get the economy back to internal balance. Swan had found, using his model, that this was what was needed in the 1930s. The diagram also shows that – as Swan had already found with his econometric model – that if full employment had instead been pursued in the 1930s by a smaller improvement in competitiveness together with a policy of fiscal expansion, then this would have worsened the external position away from external balance.  In addition, Swan also argued that whatever change in competitiveness was shown by his diagram to be necessary could be brought above in a way which preserves price stability, by the right mixture of currency depreciation (which causes inflation) and wage cuts (which case deflation); the right mixture will cause neither inflation or deflation. This is what Giblin, Copland, Brigden and Melville had been arguing in the 1930s.

What is fascinating about Swan’s work is that the post-war Australian experience of high immigration forced Swan to think clearly about internal and external balance – something which so far only Meade had explained in a very complex book – and to bring these ideas together in his simple diagram. Furthermore – as I have shown – this diagram can then be used to explain results which he had obtained in 1943 using his model, at a time when Keynes and Meade, were only just beginning to understand ideas about internal and external balance in the discussions which led up to the Bretton Woods conference a year later. Many years later, the Swan diagram is still taught to all students of macroeconomics, throughout the world, as a way of understanding the appropriate rules for making economic policy in the Bretton Woods system; rules which the IMF administered for many years. I have shown in this talk the way in which that diagram grew out of Australian experience.

I now come to my conclusion. You’ll remember that I began by saying that Australia had settled for a very protectionist policy in the 1920s. Protection and wage-fixing together made up the “Australian settlement”. There was no other macroeconomic policy in place. However, by the time Swan had competed his diagram, he had put in place a macroeconomic policy story for the Australian economy: if policymakers want to ensure that there is both internal balance and external balance then they will need to ensure that both domestic fiscal policy and the competitiveness of the economy is appropriate. I have so far followed Swan in supposing that policymakers can improve competitiveness either by devaluing the exchange rate or by cutting the wage.

Nevertheless, Australia was still highly protectionist at the time that Swan produced his diagram. Immediately after the War Australians participated in discussions about how to liberalise trade in the world economy but they were still mainly interested in obtaining more market access for Australian goods abroad – I have talked about this – whilst at the same time remaining protectionist at home. Therefore, Swan, when setting out his diagram, argued that competitiveness could be improved by raising tariffs and becoming more protectionist, instead of by devaluing the currency. And so, when Swan argued that an economy needs to achieve both management of fiscal policy and the right level of competitiveness if it is to achieve both external and internal balance, he actually argued that any required improvement in competitiveness could be achieved by increasing the restrictions on imports, rather than by any change in the currency. In the 1960s Australian policy actually used increases in protection to bring about improvements in the trade balance and stimulus to economic activity, using the kind of analysis described in the Swan diagram to determine the size of the increases which were needed. Changes in the exchange rate were not used; the Australian dollar remained pegged to the US dollar during this period and its value was not altered.

The story this continued more or less unchanged until the 1980s. The crucial thing then was that when the exchange rate was floated, one of the very most important things done by the Hawke-Keating government. What did that do? It meant that the removal of protectionism was possible without leading to a surge in imports, thereby causing unemployment and political difficulties. This is because, as protection was removed, the exchange rate could be devalued in order to curb imports, and stimulate exports, in the way required. This is what actually happened in the gradual process of trade liberalisation which took place during the late 1980s and into the 1990s.

What I have just said is in danger of taking us into a whole new territory at the end of my talk. It is now well understood that tax policy is a better way of redistributing income than a tariff, which had served to divert income to the protected industries at the expense of farmers and other exporters during the period of the Australian settlement. Protection is no longer seen as the way to increase real wages, but capital accumulation and technical progress – the process of becoming understanding technically modern – is now seen as the way to do this. At the time of the Hawke-Keating government there came to be a realisation that the objectives of macroeconomic policy can be brought about in ways other than through protection, and so protection was gradually removed.

So to come back to the central story of my talk tonight: something important happened prior to that Hawke-Keating era of the 1980s and 1990s. In this earlier time which I have been discussing, policymakers gained an understanding of how to conduct macroeconomic policy in an open economy like that of Australia, so as to achieve both external and internal balance. They drew on their understanding of what had happened in Australia in the 1930s, 1940s and 1950s, and they also drew on an understanding of what had been created in the Bretton Woods system. These understandings were admirably brought together by Trevor Swan in his diagram.

It was these understandings which made it possible for the Hawke-Keating reforms to be carried out in the 1980s and 1990s. They meant that protection could be removed, without endangering internal and external balance. These understandings, and the policies to which they led, thus formed an important platform on which the Hawke-Keating reforms could be built.