Bravo a prime minister who believes in the printed word. However, the latest essay from PM Rudd on financial meltdown and economics is based on a faulty premise. Some of which was outlined on Tuesday by Sinclair Davidson in yesterday’s Crikey email. But that is only part of the historical misunderstandings of Australia’s PM.

In his recent essay Pain on the Road to Recovery, Kevin Rudd has told Australians that the Premiers Plan of June 1931 compounded problems created by the private sector in the economic depression of the thirties. He is wrong.

Moreover, with the acceptance of the Premiers Plan by the Scullin Labor Government, and State premiers (both Labor and conservative) with the exception of the populist Lang in NSW, Australia avoided the nastier elements of the Niemeyer proposals. These had had been forced on Australia as a result of its growing indebtedness in the 1920s.

If Kevin Rudd cannot agree with the 1931 Premiers Plan — accepted by a federal cabinet that included not only Theodore but also Queensland’s Frank Forde and Labor hero Ben Chifley — or the more drastic Niemeyer proposals for recovery from debt in 1930, what is he suggesting? That Jack Lang and his repudiation of overseas borrowings was the answer? That Lang was greater than Lenin after all?

In fact, the Premiers Plan was a reaction to massive government spending in the 1920s. By 1927, Australia was in trouble and by 1931 its credit had run out. There was no John Howard surplus for Scullin or Lyons to fall back on — just ballooning debt. 1920s Australia provides a timely warning in a new era of government stimulus.

In 1955, S.J. Butlin wrote of how “development” is an “old story in Australia”. He concluded, “Part of the general thinking of all Australians on economic affairs is a not very coherent prejudice in favour of an increase in total “production”, especially the introduction of new industries, coupled with the assumption that the natural way to promote such new industries is government aid.”

1920s, US style Great Gatsby images hardly reflected Australia. For the blunt facts, try a perusal of C.B. Schedvin’s Australia and the Great Depression. Of the 1920s, Schedvin writes, “The economy stagnated: real national product fell gradually, and product per head more rapidly, so that by 1927 — well before the overseas collapse — Australia was already in a state of serious recession.”

What is often missed, in the quick glance back at the Great Depression, is that Australia was encountering a severe recession well before the stock market crash of 1929. This was after a long period of conservative federal government, falling world prices for exports and excessive borrowings on the part of all Australian governments.

As senior Australian economist Douglas Copeland said in his Alfred Marshall Lectures at Cambridge University in 1933: “Deliberate policy on the part of Australia in promoting prosperity before the depression was … largely confined to overseas borrowing and the expansion of export production … increased export production seemed an enduring monument to enterprise, overseas borrowing was good to the extent to which it increased Australia’s capacity to export. The rest was a burden of dead weight debt. Its temporary stimulus to enterprise only masked for a time its deleterious effects. When the stimulus was spent the burden became greater by contrast.”

By 1929, payments on overseas public interest were 3.4 per cent of GNP. Export income could no longer keep pace with the cost of government borrowings and governments had long borrowed to pay the costs of earlier borrowing.

At the same time, and contributing to it in no small way, was Australia’s rigid economy — the most rigid in the world according to Douglas Copeland. The Harvester Judgment of 1907 and its mandatory basic wage, uneconomic rates of pay thereafter, wage regulation and high tariffs to protect home industries, combined with heavy borrowing to develop new industries which were unprofitable in spite of increased production, all proved a disastrous mix.

Copeland recognised early how little could be done by government to offset the inevitable downturn in the Australian economy by the late 1920s. Prime Minister Stanley Bruce’s attempt to modify the arbitration system in 1929 brought down the government in a massive loss to Labor, and did little to ease the growing crisis.

The Australian industrial landscape in the 1920s had undergone a significant shift in emphasis — from its highly productive primary base to a newly developing manufacturing sector, largely with government assistance.

Urbanisation, like the communications revolution today, ate up public spending — railways, roads, sewerage, water supply, electricity and so on — all with the genuine belief that modernisation meant a better standard of living leading to increased prosperity. Like many a failed business venture, however, expectations were misguided. And, for this experiment in nation building, taxpayers eventually paid.

Schedvin sees two distinct developments impacting on Australia’s Great Depression years — each quite distinct. Efforts to spend big on social investment in the second half of the 1920s was partly a conscious effort by Australian governments to “lift the economy out of stagnation and rising unemployment caused by the increased intensity of overseas competition”.

But, as Schedvin makes clear, such stimulus underpinned by large overseas borrowings, made little or no impact on the deteriorating domestic financial situation. In fact, it contributed to meltdown in Australia before the Great Depression arrived after 1929.

Australia, as it were, suffered twice over in the late 1920s and early 1930s: once from excessive public debt and the inability to finance the debt from real income; then from the effects of international downturn and the collapse of world markets.

By 1930, Jim Scullin’s Labor government was facing a crisis of debt and downturn that could not be fixed by further borrowing. The Premiers’ Plan, forced on Australia by British lenders and deliberately deflationary, was accepted by a Labor government. It curbed borrowing and spending and laid the framework for the Lyons Government’s prudence from early 1932.

As Australian governments put their faith in big spending, financed by public borrowing, to stimulate the economy, some recall of the 1920s and PM Scullin would be wise.

*(A longer version of this comment can be found in The Sydney Institute Quarterly Issue 35 June 2009).