September 22, 2012
A Review of Breaking the Sheep’s Back. Charles Massy, UQP, 2011
“Let them note what has happened to rubber. It may point the moral that, whatever the apparent strength of a group of producers, short of absolute monopoly, which is a very rare thing, consumers can and will seek and find other supplies or substitutes rather than endure a rigged scarcity.”1
It is a fact that institutions which at a moment in history seemed to be built on foundations of solid rock, and immune to the impacts of changing fashions and beliefs, nevertheless contained within themselves the fault lines which first lead to decline and then to disintegration. The British Empire, of which Australia was once a proud member, is a good example. The Anglican Church of Australia which (except for the evangelical archdiocese of Sydney) is contracting year by year as congregations die and are not replaced, is another.
Australia’s wool industry is yet another very important example. At the time of the Korean War boom, wool was selling in May, 1951, at an unbelievable of 375 pence per pound, and Australia’s terms of trade index had climbed from 50 in 1946 to reach 120 in 1951 (2007/8 = 100). This extremely favourable trade position was not to be reached again until the mining boom of 2011.
When I was a primary schoolboy in the immediate post-war period, everyone knew that Australia rode on the sheep’s back. The size and value of the annual merino wool clip, more than any other economic indicator, determined whether Australia would enjoy prosperity or suffer balance of payments difficulties which required reducing imports and belt tightening generally.
In those days Australia produced eighty per cent of the world’s wool supply. And the Korean War’s wool boom, when wool prices reached 375 pence per pound - way beyond the fabled ‘pound for a pound’ of 240 pence - caused great inflationary pressures. Capital flows were controlled, as were imports. The tariff wall was very high. The Australian pound was tied to the pound sterling and thus unable to appreciate. Despite the impact of the wool boom the Menzies Government lost five seats in the April, 1951, election and was only 0.6 per cent ahead (50.3 - 49.7) in the overall vote. When the boom busted and wool prices halved, and would halve again by 1970, the world’s textile industry had changed forever.
Charles Massy tells us that soon after the Korean War started (June 25, 1950), the US Government secretly approached the Menzies Govt seeking to acquire the entire Australian wool clip at a guaranteed price (as the UK had done both in WWI and WWII). Despite Roland Wilson’s advice in August, 1950, warning Cabinet to take the American offer seriously and “not offend American opinion on this” and not “encourage them to build up their flocks or substitutes” the Menzies Govt spurned the American proposal and as a consequence the US textile and chemical industries, encouraged by the US government, geared up to develop substitutes for wool.
The Korean wool boom was thus a boom from which the Australian wool industry never recovered. Massy tells us:
“After the Korean War boom, therefore, the Australian wool-growing industry had two choices. The first was to adopt the approach that had led to such success for the wool textile industry over the previous eight centuries: meet increased competition with healthy competitive means via improving fibre and cloth quality and also production and manufacturing efficiencies, so as to meet customer needs at the right price. However, the Australian wool industry, confronted by such a massive disjunction in competition, took the other choice with which it could attempt to meet its competition: to seek a political path to combat competition.”2
Australian wool producers were divided between the graziers who ran large flocks, mostly supported free markets and were hostile to government intervention into the wool industry; and smaller cockies, many of whom were often trying to make livings from Soldier Settler blocks too small to be viable. The figures are startling. In 1923, half the sheep population lived on 3000 holdings with an average head count of 13,298 sheep. The remaining half lived on 75,000 holdings with an average count of 734 sheep.3
It was these farmers who provided the support base for the agrarian socialists of the Country Party, notably Black Jack McEwen, and his close allies within the wool industry, the most important being Sir William Gunn and Sir William Vines. These men wanted complete acquisition of the wool clip and total control of the wool industry by the Commonwealth. McEwen was, in some aspects of policy, more powerful than Menzies. Despite his unrepentant agrarian socialism, and disastrous protectionism, he had strong supporters within the Liberal Party, and when Menzies retired as PM in January, 1966, they moved strenuously to try to get McEwen in as Menzies’ long-term successor.
The argument which the wool socialists used to justify their campaign for total acquisition and the creation of a Reserve Price Scheme was that as Australia produced 80 percent of the world’s wool, it was in a quasi-monopoly position and should therefore behave as a monopolist, extracting monopoly rents from the world market for the benefit of Australian wool growers.
These arguments had been shaped many years previously by Sir John Higgins, who was in charge of the wool acquisition scheme which enabled the Australian government to hand over the entire Australian wool clip to the UK for the duration of the Great War. In 1931 at the Empire Wool Conference, he argued:
With hindsight, of course, these arguments today look so thin as to be sad. But in the thirties socialism was still a powerful force and, of course, in the forties Australia was to experience the great debate over the nationalization of the banks.
Even in the thirties there were powerful contra-arguments, but they seemed to carry little weight. Attempts to establish monopoly cartels in various commodities (except for diamonds) have been uniformly unsuccessful. The rubber cartel and the international tin agreement (which came later) crashed with disastrous consequences for those involved. The diamond cartel, run by De Beers, has been unique in its longevity and its profitability. Wool growers did not believe that substitutes could displace wool from its privileged position, a position it had enjoyed for centuries, and in the early 1950s, talk of synthetics seemed to be idle speculation.
So Edward Shann’s warning of 1930 was forgotten and although two referenda, the first in 1951, and the second in 1965 seeking wool-grower support for a compulsory acquisition scheme were both defeated (the first overwhelmingly) the campaign for bringing the wool industry under government control, was only temporarily set back. Sir John McEwen, Sir William Gunn, and Sir William Vines were determined to get their way and through chicanery, patience and clever use of price changes in the wool market, they got their way when the McMahon Government, on 20 June 1972, approved the establishment of the Australian Wool Corporation AWC) which would have the statutory authority to ultimately acquire the total wool clip and run a Reserve Price Scheme (RPS).
In this way the great Australian wool industry was taken over by agrarian socialists. That socialism doesn’t work was demonstrated again in Feb 1991 when PM Bob Hawke stated on Channel 9 that the RPS wasn’t working and could not be retained. The wool stockpile amounted to over 4 billion bales and the AWC was buying 71 per cent of the wool clip. The wool industry’s debts were reaching $4 billions. It was and would remain the biggest corporate collapse in Australia’s history.
Today, Australia’s wool production is the lowest for 50 years and is still shrinking. Wool prices have declined, but growers continue to be taxed to pay for the International Wool Secretariat and promotional activities which have had either no impact or have hastened decline.
Massy’s story is one of the failure of socialism. It has cost Australia many, many billions of lost export income, and has caused the collapse of many towns in rural Australia. It is a story which should be widely read.
1Edward Shann Bond or Free? Angus and Robertson, Sydney 1930, p.13
2 p 19
3A S Watson. Wool in the 1980s. Australian Journal of Agricultural Economics Aug 1980
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