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Supply-Side Shocks: The Case of Australian Gold

Published online by Cambridge University Press:  03 March 2009

Rodney Maddock  and
Ian McLean
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Abstract

A literature has developed recently to analyze the disruptive effects on small, open economies of a sudden change in the value of their natural resources. The paper looks to that literature to explain the effect on the Australian colonies of the discovery of substantial gold deposits in the 1850s. The price and quantity adjustments predicted by the model are found to be well supported by the historical experience with one important exception. Immigration played a far greater role in the Australian case than has been suggested in the theoretical literature. The model does, however, allow for a compact description of the confusing decade in Australian history and explains a number of previously unconnected phenomena.

Type
Articles
Information
The Journal of Economic History , Volume 44 , Issue 4 , December 1984 , pp. 1047 - 1067
Copyright
Copyright © The Economic History Association 1984

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References

1 We use the term Australia and Australian in their modern senses, although Federation did not occur until 1901.Google Scholar

2 For a comparative account of several nineteenth-century gold rushes, see Morrell, W. P., The Gold Rushes (London, 1940).Google Scholar In the paper we ignore the global effects of the increase in gold production, but see Cairnes, J. E., Essays in Political Economy (London, 1873), pp. 77–108, for a discussion of the issue.Google Scholar Discussion and extension of Cairnes's analysis may be found in two articles by Bordo, M. D.: “John E. Cairnes on the Effects of the Australian Gold Discoveries, 1851–73: An Early Application of the Methodology of Positive Economics,” History of Political Economy, 7 (Fall 1975), 337–59,Google Scholar and “The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts,” Journal of Political Economy, 88 (12 1980), 1088–1109.CrossRefGoogle Scholar

3 Corden, W. M. has recently provided a helpful overview of the work in “Booming Sector and Dutch Disease Economics: Survey and Consolidation,” Oxford Economic Papers (forthcoming).Google ScholarCorden, and Neary, J. P. provide a more technical analysis of a variety of cases: “Booming Sector and De-industrialization in a Small Open Economy,” The Economic Journal, 92 (12 1982), 825–48.CrossRefGoogle Scholar The seminal Australian article is that of Gregory, R. G., “Some Implications of the Growth of the Mineral Sector,” Australian Journal of Agricultural Economics, 20 (08 1976), 71–91.CrossRefGoogle Scholar

4 Discussion of some monetary effects of the Australian gold discoveries is to be found in Butlin, S. J., “The South Australian Devaluation of 1852,” Business Archives and History, 8 (08 1963), 156–86;CrossRefGoogle Scholar and in Holder, R. F., Bank of New South Wales: A History, 2 vols. (Sydney, 1970).Google Scholar Our focus is on structural change, hence, the real effects. Cairnes, J. E. (Essays in Political Economy, pp. 1–165) produces an early account of the whole period that emphasizes the monetary aspects;Google Scholar and Hall, A. R. (“Capital Imports and the Composition of Investment in a Borrowing Country” in The Export of Capital from Britain, 1870–1940, ed. Hall, A. R. [London, 1968]) uses a related model to consider capital inflows in late nineteenth-century Australian economic history.Google ScholarGoodwin, C. D., “British Economists and Australian Gold,” this JOURNAL, 30 (06 1970), 405–26, discusses contemporary fears of a dislocation in the British economy, though without employing any formal model.Google Scholar

5 We have employed the model principally to examine aggregate and general effects. It could also be used to analyze differences between the colonies, largely ignored in the paper. Our assumption for the most part is that the economies can be treated as one.Google Scholar

6 United States census figures are contrasted with those derived by McCarty, J. W., “Australian Capital Cities in the Nineteenth Century,” Australian Economic History Review, 10 (09 1970), 107–37.CrossRefGoogle Scholar

7 The GDP estimate for 1850 is derived by backcasting the known 1861 GDP figure using population and wage data from Table 1 and Appendix Table I.Google Scholar

8 The rushes were initially associated with alluvial mining, but methods of extraction and the structure of the industry changed with the rise of the more capital-intensive reef mining. In the 1854 Victorian census of occupation, 36,000 were listed as working in the gold-mining industry. In the 1857 census, when quartz mining was separately distinguished, 5 percent of the industry work force of 62,000 were engaged in quartz mining, and by 1861 14 percent (out of the same size of work force) were so enumerated.Google Scholar

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10 we have no adequate statistics of intercolonial migration.Google Scholar

11 The position of Australia in the international wool market during the nineteenth century deserves further study. There are no estimates available of the price elasticity of demand for Australian wool for the period despite its importance in exports and development.Google Scholar

12 Gold, after all, is distinguished as an export commodity by its high value to bulk ratio. The decline in ocean freight rates led to a reduction in the practice of “dumping”—compressing bales of wool prior to shipment. See Westgarth, W., The Colony of Victoria: Its History, Commerce and Gold Mining (London, 1864), pp. 269–70.Google Scholar

13 Ibid., p. 268.

14 The important role played in containing the price movement by anticipations that induced speculative importation is noted by Coghlan, T. A., Labor and Industry in Australia (Melbourne, 1969, first published in 1918), vol. 2, pp. 786–87, though in the paper we ignore the role played by expectations.Google Scholar

15 This has been noted by Peel, L. J., Rural Industry in the Port Phillip Region, 1835–1880 (Melbourne, 1974), pp. 58–59, 96–97.Google Scholar

16 Coghlan, , Labor and Industry, vol. 2, pp. 679–80, worried about the different trends in New South Wales and Victoria without resolving the issue. Clearly in New South Wales, further from the main population centers, the demands for perishable animal products would not have set up the same inducement to substitute. With respect to victoria, Westgarth noted: “If a digging makes an uncomfortable uproar in the midst of a squatting district, yet it brings to the squatter's door what his success greatly depends on, a ready market for his surplus live stock” (The Colony of Victoria, p. 264).Google Scholar

17 The numbers of manufacturing establishments in Victoria are too small at the start of the period for sensible comparison.Google Scholar

18 The building trades in the period were the first in Australia to obtain the eight-hour day—as discussed by Hughes, Helen, “The Eight Hour Day and the Development of the Labor Movement in Victoria in the Eighteen-Fifties,” Historical Studies, 9 (05 1961), 396–410.Google ScholarCoghlan, , Labor and Industry, vol. 2, p. 799, notes that the inflation was such that builders stopped offering fixed- price contracts.Google Scholar

19 For a more rigorous discussion of a number of the theoretical issues discussed here see J. H. Cassing and P. G. Warr, “The Distributional Impact of a Resources Boom,” Journal of International Economics (forthcoming).Google Scholar

20 During periods of unemployment, reservations were expressed about the policy, but the general tone was to encourage the greatest possible immigration.Google Scholar

21 The comparisons are relative to 1850 levels, and are not based on absolute differences in real wages between the two countries. It seems likely that the Victorian real-wage level after 1854 as recorded is too low but the trends are clear. The continued immigration into Victoria following the elimination of any real wage gap may be due to imperfect information flows to potential migrants or lags in the transmission of revised information about economic conditions in Victoria.Google Scholar

22 These points have been made admirably by Blainey, G., “The Gold Rushes: The Year of Decision,” Historical Studies, 10 (05 1962), 138–39. There has been some discussion of the “high” license fee being set and administered to discourage population flows to the fields. The size of the migrations (sectoral, regional, and international) shows that they had little effect. At most, high fees should be seen as an attefnpt by pastoralists to segment the labor market in order to retain their own workers.Google Scholar

23 Californian solutions to similar problems are described in Umbeck, J., “The Californian Gold Rush: A Study of Emerging Property Rights,” Explorations in Economic History, 14 (07 1977), 197–226.CrossRefGoogle Scholar

24 The incident and its causes have provoked a substantial literature: see Serle, G., The Golden Age: A History of the Colony of Victoria, 1851–1861 (Melbourne, 1963), chap. 6.Google Scholar

25 Goodwin, “British Economists,” points out that the canons of public finance as perceived in the 1850s supported the production levy.Google Scholar

26 See Hall's, Alan paper on the demographic consequences of the 1850s population explosion: “Some Long Period Effects of the Kinked Age Distribution of the Population of Australia, 1861–1961,” Economic Record, 39 (03 1963), 43–52.CrossRefGoogle Scholar