From fear of depression to fear of war: a reinterpretation of the political issues involved in the transition from the Chifley government to the Menzies government, 1945-1952

Abstract

In this thesis I attempt to trace the most important differences between the Chifley and Menzies governments Without disagreeing with the view that the two governments agreed on many things, such as the need for a large immigration programme, Keynesian economic ideas, and the welfare state, I argue that there was a fundamental difference between the two governments: their attitudes and policies to the threats of depression and war. A Labor government afraid of depression but relatively confident that another war would not break out, gave way to a Liberal-Country party government which feared the outbreak of war but not a depression. The Labor government hoped to protect Australia from depression by participating in the new economic world order being built by the United States after the second world war. However it tried to mould the American multilateral system into one which would guarantee full employment throughout the world. America’s idea of free trade defeated Australia's idea of full employment in the making of the new economic world order. But multilateralism foundered because of the dollar shortage in the world outside the United States. The United States wanted to dismantle the sterling area and to incorporate it immediately into the multilateral world order. However the United Kingdom found that she could not adopt multilateralism without massive foreign aid from the United States. Instead of embracing multilateralism, the United Kingdom resolved to shore up the sterling area, until some means of overcoming the dollar shortage could be found. The Australian Labor government resolved to cooperate with the United Kingdom in consolidating the sterling area as a discriminatory economic bloc. Chifley made a deliberate decision to stick with the United Kingdom rather than to seek a stronger economic relationship with the United States. The opposition Liberal and Country parties chafed at the restrictions and rationing caused by the Labor government’s pro-sterling area economic policies. They defeated the Labor government in 1949 by campaigning against its policy on the sterling-dollar problem, its domestic economic policy, its handling of the coal strike, and bank nationalisation. The issue of socialism was largely rhetorical.The fundamental difference between the two governments was not about the degree of government ownership of industry and banking. The Menzies’ government’s major new initiative was to make serious defence preparations against the danger of war. It abandoned Labor's internationalist foreign policy and regional defence policy and substituted for them a policy of making Australia a partner in the western anticommunist alliance being formed against the Soviet Union and the emergent communist China. Menzies expanded defence spending along with public and private investment in a policy of ‘national development’. This was in stark contrast to Chifley’s fiscally cautious anti-depression economic policy. It involved running a huge import surplus at a time when the sterling-dollar problem was still serious and when Australia was vulnerable to an economic downturn. Fortunately for Menzies, American rearmament, the Korean war wool boom, and a dollar loan .from the United States temporarily solved the dollar problem for Australia and the sterling area. Menzies succeeded in being able to have both increased defence expenditure and increased civilian investment. Moreover the Menzies government decided that Australia could not be developed at the rate it wanted simply with British and Australian capital. Its policy was that Australia had to forge a new political and economic relationship with the United States. The Liberal-Country party government hoped that this policy would free up the economy, enable Australia to borrow from America, increase the flow of American capital into Australia, and allow the government to abolish the controls and restrictions associated with Labor’s policy of protecting the sterling area.