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as a rough index of the degree to which enterprise deadened during the crisis. A decline commenced in August 1920 and was very persistent until October 1921. This was followed by a recovery, and Stock Exchange reported active investment by the beginning of 1922, which continued throughout the year and during the early months of 1923. Recent reviews show that investment has been checked and the volume of business is below the average.

Table II. gives an index of production for the Commonwealth, and it will be noted that the year 1919–20 was the lowest. But a general decline from 1913 is to be observed. Trade activity as measured for estimating the equation of exchange does not portray this decline in the same degree, and has been rising since 1918.1 While production had decreased considerably and trade had fallen to a less extent, money in circulation and credit were increasing. In these circumstances and pending a recovery in trade a crisis was inevitable. It is usual in the pre-crisis period for production to fall away a little. Business management is less efficient, there is a tendency to extravagance, luxury trades flourish and a greater proportion of construction work miscarries. But in this instance there was this heavy and persistent decline in production which made the crisis of greater severity. In this sense inadequate production was a cause of our troubles in 1921, and increased output would have offered some escape. But a period of decreasing production is possible without any crisis, provided expenditure and other factors are adjusted to the new circumstances. It was one of the features of this boom period that expenditure increased while production decreased : nothing but “ bad times” could be the outcome of such folly.

V. DIFFICULTIES IN THE CRITICAL PERIOD When the crisis developed the usual difficulties arose : producers found their markets falling away, while costs of production remained stable; credit was difficult to obtain owing to the restrictive policy of the banks; labour was not prepared to countenance any fall in wages or change in working hours; the demands of the unemployed were insistent, and the burdens of taxation were by no means lighter because of the crisis. In Australia some of these difficulties were rather pronounced. Industrial costs, particularly wages, remained stable or even rose for many months after the drop in wholesale prices; labour was

1 Article by the present writer on “ Equation of Exchange" in Banking and Insurance Record, December 1922.

suspicious of any attempt to readjust costs to the new conditions, and Governments found it impossible to reduce their expenditure. The whole situation was further complicated by the difference between the purchasing power of the products of different industries, and especially by the fall in the prices of minerals and rural products. It was a common error to mistake these factors for the real causes of the crisis. They were results only, and arose through the inevitable delay in readjusting the varied elements of costs and expenditure to a new situation forced upon the economic system by the dramatic fall in wholesale prices. But they have led men to conclusions regarding the regulation of wages and industrial conditions, the functions of trade unionism and labour organisations, and the problems of public finance which might materially affect the future of industry and government. Of these problems, as in many others mentioned in this paper, it is possible to give only a meagre outline and to leave a more thorough treatment to those who are able to collect all the data.

For many years the cost of living had been accepted as the basis upon which wages were regulated. The process might well have been automatic, but the records of Arbitration Courts are replete with arguments and counter-arguments regarding the validity of index-numbers and the justice of adjusting wages to the cost of living. An enterprising student will some day review these arguments, and he will be struck with the comparative neglect of the basic factor which determines the rate of wages. On these grounds arbitration has been a costly experiment for Australia, but failure to apply a principle soundly should not, as many suppose, warrant the condemnation of that principle. The productivity of industry is the final source of wages, and arbitration cannot be successful if it ignores this factor. During the period of inflation the cost of living rose less than either wholesale or retail prices, and wages lagged behind.

In the critical years 1920–22 the movements in these factors were bewildering, as may be seen from the following comparison (Table VIII).

The position thus revealed has created a very difficult situation in Australia, and is to a large extent responsible for the reaction that has set in against arbitration. The erroneous impression that high wages caused the crisis is also due to it, and in general it is the most disturbing factor in the economic situation at the present moment. Of course the employers object to this most emphatically, but in some quarters the leaders of the workers

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Note. - This table indicates the degree to which the Australian price level has

responded to movements abroad. We are experiencing a steady recovery and prices are steadily on the up grade. It is interesting to observe how wages lag behind prices. Wages are now rising again, the number for June last being 1790 and that for March 1783.

objected equally strongly to the slow adjustment of wages by the Court during the time of rising prices. The practice of regulating wages according to the changes in the cost of living is in the main responsible for it. This has come to be regarded as the soundest basis upon which wages should be fixed, and in 1919, when the Prime Minister set up the Basic Wage Commission, he did not provide against the possible contingency that the wage decided upon might not be within the limits of the country's productivity. But as soon as the report was announced there was an outcry against the rates proposed, and the report was not adopted. By raising the question of production it was easy to create an impression against the high rates proposed. 1

But a close examination of the problem was not made, and the adjustment of wages according to changes in the cost of living continued without serious opposition until the development of the crisis. Then a cry of general impoverishment was raised, and employers sought to obtain lower rates because wholesale prices had fallen. The Courts on the whole kept to the cost of living as a basis for fixing wages, though in some cases, for instance in the copper-mining industry, lower rates were fixed at once. It is mainly because of this that the adjustment of wages to changing prices has been so protracted. But it should not be overlooked that wages rose slowly during the period of inflation, and that real wages were lower during the whole period 1914-19 than they were in 1913. An examination of the table on p. 86 of the Labour and Industrial Branch Report (No. 13) and the graph on

1 The Commission proposed a rate of £5 168. per week at a time when the weekly wage for adult males was £4 98. 10d.

p. 8 is interesting on this point and should prove disquieting alike to opponents and advocates of arbitration. The general result is that in years of rapidly rising prices wages lagged behind when the productivity of industry might have justified higher rates, but in the period of depression wages are relatively higher than before, and the readjustment is slow. This shows the rigidity of the arbitration system and the difficulties that arise through the regulation of industrial costs on so artificial a standard.1

These difficulties are increased by the attitude of labour. The standard of living plays a very important part in determining the rate of wages even under competition; in a system of regulation it is of greater importance, and its influence is most pronounced in a period of deflation. For it is the worker's conception of the standard that counts in this respect, and unfortunately his conception is largely a matter of money wages. Any reduction of wages appears to him as a blow at a standard of living that has been won only through close organisation and constant aggression. Hence any fall in wages is to be resisted at all costs. This was the attitude of the powerful unions during the crisis, and at the industrial conference convened by the Prime Minister in February 1922 the representatives of the employees stoutly resisted any attempt at a reduction. They argued that labour had not shared in the prosperous times, that real or effective wages had decreased during the war, and that labour was not a real partner in industry, and therefore could not be held responsible for the depression and should not be asked to make a sacrifice. Further, no reduction in wages should be asked for without a complete statement of the finances of industry. In this mood, especially as the employers resisted these claims, 2 difficulties were to be expected.

Another source of difficulty is to be found in the impossibility of any immediate reduction in Government expenditure and taxation. This is inevitable, for the costs of Government lag behind the price level. During the period of inflation Government expenditure was relatively less, but in the earlier months

Professor Condliffe finds the same difficulty in New Zealand. See his review of the position of the Arbitration Court in New Zealand in the ECONOMIC JOURNAL, December 1921: “In the past it has if anything kept wages back; it would probably act as conservatively in a time of falling prices " (p. 554).

“If it is expected that the cost of our business and other matters that are kept in confidence by the directors and the staff are, as it were, to be thrown to the lions to make a Roman holiday, you gentlemen are making a mistake, as we are going to do nothing of the sort.”—Mr. H. V. McKay for the employers, Report of the Industrial Conference, 1922, p. 48.

of the process of deflation it increased both absolutely and relatively to the value of money. This may be seen as follows :

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Here we see a substantial increase in 1921 when the crisis was most severe. It is not till 1922 that a decline is noticed, and 1923 shows but a slight decrease. Elsewhere I have examined the problem with reference to Tasmania, and have shown that the “ burden of taxation ” was not seriously felt until the crisis developed. This has led to some erroneous conclusions regarding the activities of Governments and the real cause of our present misfortunes. The principles of public finance in Australia have long been awaiting scientific review, but with the meagre information available it is quite certain that unsound finance was not the chief cause of the recent crisis, as many politicians would have us believe. The crisis, here as in many other matters, only served to reveal the real weaknesses of our financial and economic methods during the period of prosperity. Unless this lesson is learned this crisis will pass without any preparation for the next.

VI. OPINION AND THE CRISIS : PROBLEMS FOR THE FUTURE

This analysis of the trade depression in Australia would doubtless be received with some impatience by the business and labour leaders of the Commonwealth as well as by the Governments. Despite our bold social experiments, concerning which there is probably an exaggerated view abroad, we pay little respect to economists. This is not surprising, for economics is only now receiving due recognition by our higher educational institutions. Indeed in one of our leading Universities the study is scarcely recognised. Until the Universities have developed a greater respect for the conclusions of pure economics, and our economists have provided data for the study of our leading problems, we cannot expect political and industrial leaders to be

1 " The Public Finances of Tasmania," published by the Mercury, Hobart.

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