RDP 8303: The 1930's and the 1980's: Some Facts 6. Concluding Comments on the Facts

In comparing the 1920's and 1930's with the 1970's and 1980's, it is quickly evident that there are similarities and differences. Both periods saw a sharp rise in unemployment. Prices were generally falling in the 1920's and 1930's while most prices have risen (in some cases by a large amount) in the 1970's and 1980's.

World trade fell much more severely from the late 1920's than seems likely in the current episode. The rise and fall in Australia's terms of trade was much larger in the earlier episode. While Australia is still a small open economy its economic base is now much wider; also the external shock has been much smaller in the current episode.

Overseas borrowings in the 1920's was on a much vaster scale in relative terms than in the 1970's. The debt servicing burden is consequently much smaller in the 1980's than it was in the 1930's. Also, in the late 1920's, capital inflow dried up (forcing large adjustments to eliminate the current account deficit) whereas in recent times capital inflow has tended to exceed the large current account deficits.

Although the timing and mechanisms differed, both periods saw a noticeable rise in real unit labour costs. The rise was larger in the earlier episode and strongly influenced by the enormous fluctuations in the terms of trade. Helped by a “once for all” cut in real wages, there was a sharp fall in unit labour costs in response to the economic crisis of the 1930's. A more gradual reduction has been predicted for the 1980's.

The responses of general economic policy have also been different in the later episode. Budget deficits were cut back strongly in the 1930's while they have expanded in the 1980's. Levels of protection were raised sharply in the 1930's and the exchange rate was cut relatively late. In the 1980's the exchange rate was devalued early and average levels of protection have not changed much. Monetary policy has been more stable and, on average, less deflationary in the recent episode (whether measured by real rates of interest or by the growth of monetary aggregates).