Chapter 1
Federation and the
free trade alternative
When Australia’s federal parliament first convened in May 1901, its members divided into three parties; Protectionist, Freetrade and Labor. The vigour and relevance of free trade politics can be seen in the fact that free trade was the political basis around which the first federal opposition was organised. The Labor party too was divided between free traders, protectionists, and those with no definite position on the fiscal issue. While protectionism had a small majority in the House of Representatives, free trade was in the ascendant in the Senate.
The recently-adopted Constitution had established free trade between the former Australian colonies as one of the basic principles of federation, and given the sole power to impose tariffs to the new federal parliament. It also obliged parliament to set the first Australian tariff within the first two years of federation, so it is not surprising that tariff policy was the dominant issue in the first federal election. Nevertheless, the fact that Australia’s bourgeois politicians divided into parties on the issue reflected a long and deep history of conflict within and between the colonies on fiscal policy.
There were three dimensions to the issue of tariffs: taxation, industry protection and class. For most colonies pre-federation, and especially Victoria, tariffs were the source of much of the government’s revenue, and a high level of government revenue was vital for the development of railways, ports, bridges, telegraphic services and other vital elements of infrastructure. In 1897, the total revenue of the Australian colonial governments was a third of that of the British government. However, while tariffs in part facilitated economic development, they were also a tax, raising the price of imported goods and burdening those industries and those people who were expected to pay the extra tax. Thus in all colonies, there were from time to time conflicts between those who wanted to raise tariffs to provide revenue for government activities, and those who preferred “retrenchment” to reduce the tax burden. There were also sectional conflicts over what commodities should be taxed, and sometimes this involved class conflict. For instance, tariffs on tea and kerosene were popular with the well-off because the burden was placed mostly on the working classes (who resented them for the same reason).
It was in the colony of Victoria that protective tariffs were first adopted as a means to encourage fledgling manufacturing industries. The high priest of protectionism was David Syme, publisher of the Age newspaper. Syme was profoundly influenced by German economic theorists such as List, and by the example of the United States, where a protectionist regime coincided with the rapid development of modern manufacturing. While Victoria’s liberals were uniformly protectionist, the colony’s conservatives were divided, with free trade strong amongst the squatters, whose prices were set by the market in London, while their costs were increased by tariffs on machinery, and by the need to pay higher wages to workers who were paying more for their clothes, boots, and other necessities.
In New South Wales, the major source of government revenue, from self-government in 1856 right through to federation, was the sale of Crown land and the income this provided was so large that tariffs could generally be kept to a minimum. There were powerful interests ranged against the widespread use of tariffs. New South Wales was a far more significant wool producer than Victoria, and squatters wanted their costs kept as low as possible. Sydney was a major trading and commercial centre, and the fourth largest port in the British Empire. Broadly-based tariffs threatened entrepôt trade and imposed significant costs on merchants, who were then obliged to pay the tariff before any sale, and obliged to organise separate storage of goods on which the tariff had not yet been assessed and paid. Free trade became “the common ground on which the colony's politicians met”. There were major political crises in New South Wales every time a government faced a cyclical deficit and proposed new tariffs or tariff increases to fund it. A protectionist minority finally emerged in New South Wales, and was strengthened a Chamber of Manufactures was organised, initially in 1885.
Australia’s free trade leader from 1901 to 1908, George Reid, first made his mark writing Five Tree Trade Essays in 1875, a polemic aimed at discrediting David Syme’s protectionist doctrine. Reid argued a position that today would be called comparative advantage; that the colonies should not insist that capital be employed in areas where it is inherently unprofitable. He saw no problem with the colonies importing so much from England; “is she not, in return, the best customer we have?” Most tellingly he pointed to the high wages of workers as the most substantial obstacle to colonial manufacturing, whereas the great export industries could sustain those wages. Victoria’s tariffs, by contrast, created the evil of vested interests, they corrupted politics, they taxed the poor and worst of all, “interfere with the free play of private enterprise.” Free traders were not opposed to all tariffs; just those which aimed to protect industries. Tariffs to provide government revenue — revenue tariffs — were acceptable provided they were absolutely necessary.
There was no easy resolution as to which was the better policy. In the years before the depression of the 1890s, manufacturing industry had grown rapidly and at a similar rate in both Victoria and New South Wales. Victoria’s protectionism seemed to do little to protect either jobs or business during the 1890s depression as the state suffered a far more severe collapse than New South Wales, allowing it to finally overtake Victoria in population.
The emergence of Labor as a party defined by class interests was perhaps the most powerful force undermining fiscally-based politics. Labor’s first and most spectacular electoral success came in the New South Wales election of 1891 when it succeeded in getting 36 of its candidates elected. However within months, the leaders of both the Protectionist and Freetrade parties had succeeded in utterly dividing the new party on the fiscal question, rendering it almost helpless in parliament and dividing its branches. But this victory was short-lived. Within the working class, a new and more widespread class consciousness had developed as a result of the historic strikes of the early 1890s, and the catastrophic depression that followed. This class consciousness was strongest in NSW and Queensland, where new unionism had been based and the strikes most bitter. Many workers drew semi-socialist conclusions, and socialists were at the heart of organising the Labor party through its earliest years in the 1890s.
Many of these early Labor activists saw the fiscal debate as a diversion, arguing that neither free trade nor protection would benefit the working class, and that taking sides in the bourgeois fiscal debate divided the labour movement. As Charles Seymour, one of the most significant figures in the early Queensland Labor Party, wrote:
Those who will benefit by protection are those who hold the means of production… For what protection is there for the labourer when labour is in excess of demand… There is poverty both in Freetrade England and in Protective America.
In the mid-1890s, George Reid had given free trade a radical veneer. As Premier of New South Wales in 1894, Reid had proposed land and income taxes to provide the state with revenue in order to reduce and eliminate tariffs imposed by an earlier protectionist government. To get his way, he had created a political crisis, confronting the Upper House when it blocked his direct taxes, attacking it as undemocratic, threatening to swamp it, and calling a special election to prove he had popular support. At its February 1900 conference, Reid’s Australian Free Trade and Liberal Association had resolved that “Any deficiency of revenue” from a low tariff regime should “be made up by direct taxation.” However Reid backtracked, and began his federal political career by rejecting the idea of federal direct (ie land and income) taxes, thus substantially narrowing the popular base for free trade. Reid’s biographer argues that he “could not fall back on an advocacy of the brand of free trade he had made the fiscal policy of New South Wales”:
a comprehensive system of direct taxation would have been unthinkable as the basis of Commonwealth finance in the early years of federation, even apart from the existence of large numbers of conservatives in the Free Trade Party…there had grown up, particularly in Victoria, but also in South Australia, Queensland and Tasmania, a considerable number of highly protected industries: to advocate the complete withdrawal of their protection would have been political suicide. Thirdly, the Braddon Clause had forced free traders to come to terms with at least a moderately high tariff. The group which tacitly accepted Reid as its leader in 1901 called itself the Free Trade Party, but its policy was based on revenue tariffs.
McMinn summarises the argument of those historians who regard free trade as an impossible policy once Australia had federated. Yet the decision to exclude direct taxes was a political choice. The ideas of Henry George, who advocated free trade and the elimination of all taxes except land tax, were immensely popular in Australia from the late 1880s, and Reid was now cutting himself off from that current. Indeed, Labor won the 1910 election in a landslide with a land tax as one of its central policies. But land and income taxes were imposed on the rich, and the Freetrade party in federal parliament had become a party dominated by rich businesspeople and landholders, as LF Crisp has shown. The Braddon clause did not force a federal government to impose customs duties; and there was nothing to prevent a federal government making grants to the states in accordance with their needs — indeed before 1908, a substantial amount was given to the states over their Braddon clause entitlements. The one argument of substance in McMinn’s account is that no federal government could destroy the tariff regime upon which Victorian manufacturing had come to depend. But that is not to say that gradual reduction was not feasible; indeed it is ironic that Victorian manufacturing flourished under the compromise tariff eventually passed, despite most duties being lower than the old Victorian duties.
The election was a triumph for Labor and a modest success for Reid and the Freetrade party. During the election campaign, Labor was largely ignored by the newspapers as an irrelevant fringe party, yet it emerged with 16 of the 75 seats in the House of Representatives. Reid’s Freetrade party gained 27, and the Barton ministerialists 32, considerably short of a majority and a poor result given the advantages of incumbency and the imprimatur of having been chosen by the Governor-General to lead the country to federation.
The first tariff debate reflected the relative strength of free trade, and the determination of Labor to keep the cost of living for the working class low. The tariff, tabled on 8 October 1901, was substantially reduced in the debate. Freetrade members argued that natural protection, that is distance and freight charges, should be enough to guarantee the existence and growth of industries in Australia; that freedom of trade would prevent the growth of monopolies; and that competition would keep prices down for the consumer. When Customs Minister Charles Kingston appealed for tariffs to cure unemployment and poverty at a time of recession and terrible drought, Reid countered with an equally emotional appeal, arguing that “when labour is struggling with hardship and distress, in the name of heaven relieve it in some other way than by putting burdens on every rag which the wife and child wear, and every morsel of food which they eat.”
The overwhelming feature of the voting was the orientation of most individual MPs to support sectional interests, usually those of significance in their electorate. So, for example, politicians representing the Victorian manufacturing interest voted solidly for the retention of duties on goods which they produced, for example furs, hats, boots, woollens, cottons, and blankets. The Victorian rural interest pushed successfully for agricultural machinery to be put on the list of exemptions. SA politicians wanted to protect their primary industries of salt, wheat and flour. WA politicians wanted the freeing of preservatives from tariffs, especially dried milk and preserved fruits. Tasmania’s representatives worked to protect their traditional industry, hops. Queenslanders wanted to foster sugar, bananas, tobacco, and timber. Queensland Freetraders and Queensland Protectionists united to support a proposed duty on imported Oregon pine. Of paramount importance to MPs from the smaller states, Queensland, Western Australia and Tasmania, was making sure the tariff secured sufficient revenue for their state governments to finance infrastructure and economic growth.
While Labor was divided on the fiscal issue, it
was united and solid against purely revenue duties, and took steps in caucus to select a list of such items upon which to vote as a party. In all sixteen items were agreed to, including tea and kerosene, cotton goods, etc. — all items which could not be produced in Australia as yet, and duties upon which pressed heavily upon the workers.
Indeed Labor MPs decided to vote solidly for reduced duties once it was apparent that far more revenue would be raised than strictly necessary. Labor concern over items for household consumption saw duties halved on arrowroot, bananas, blue, cocoa and chocolate, oatmeal, mustard, salt, and common soap; while duties were cut by a third on biscuits, candles, jams, jellies, and condensed milk.
One of the most interesting arguments was over proposals from the Protectionist government for a tax on tea. It was supported by conservative Freetraders from Victoria, New South Wales and South Australia, who wanted the revenue for their states and were attracted by the possibility of spreading the taxation load “across all classes”. Opposed to the tax were Labor, and radicals from both the Freetrade and Protectionist parties, who opposed its heavy burden on workers and the poor. The most significant feature of the vote, says Yvonne Larsson, was the way “it provided guidelines for the future division of the House when the fusion of the non-Labor groups took place in 1909.”
There was a considerable range of interests against high tariffs, meaning that at the end of the debate, the Freetraders had managed to secure a respectable compromise, with tariffs significantly lower than those proposed by Kingston. Very few items remained with a 30% ad valorem duty. According to Yvonne Larsson, the Labor party voted with the Freetrade party in 50.39% of divisions, using its numbers to reduce duties and reduce the impact on working class people, small farmers and mining companies.
For the first three years of federation, the Freetrade party had laboured under a number of practical difficulties. Parliament was based in Melbourne, meaning that it often lacked its full complement of numbers, since many were unable to give up their jobs or businesses to live in Melbourne every time parliament sat. Reid in particular maintained his practice at the Sydney bar to keep his family, and his absence was sorely felt. Nevertheless, the party felt confident enough to go to the December 1903 election on a platform of revision of all the clearly protective tariffs. While losing three seats, Reid had the pleasure of seeing the Protectionist party lose far more, so that in the second federal parliament, the fiscal rivals were of equal size. If the demise of free trade was inevitable, no-one had told the Freetrade party or the electorate.