... is the nation’s 6th largest export earner ... earned $14 billion of export revenue in 2014-15 ... is the 2nd largest producer of gold in the world

Gold and Australia’s economic development


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The discovery of gold in Australia in 1851 was a defining event in both the economic and social development of Australia. Within 50 years of the discovery of gold the Australian colonies had obtained the right to self governance (within imperial limits) and Australian per capita income was one of the highest in the world. Today, gold remains an important component of Australia’s export portfolio.

Eureka! Gold discovered in Australia

Gold was ‘officially’ first discovered in Australia in Bathurst, NSW in April 1851, but it is widely accepted that it had been found a number of times prior to this date. However, these discoveries were either very small or suppressed by the Colonial governments of the time to avoid penal labour leaving their current areas of employment in order to seek their fortune on the gold fields (Goodwin, 1970).

The significance of the discovery in 1851 was that the Californian gold rush was already underway, and the colonies were already facing competition for migrants from California. By declaring the discovery of gold, and allowing for prospecting, the governments of the colonies saw a way to maintain or grow their population and economic growth.

Impacts of the gold rush on Australia

The decade subsequent to the discovery of gold was a tumultuous time in Australia’s economic and social development. Initially, the discovery of gold caused a large degree of dislocation in other sectors and industries of the economy. For instance, it is estimated that between 1851 and 1852 the average annual wage of a miner in Victoria increased from £70 to £357 (Maddock and McLean, 1984). Even before this five-fold increase, the wage level of miners already enjoyed a significant premium to other professions.

Given the large disparities in mining and other sectors there was a ‘rush’ to seek employment in mining. This created a problem to employers in non-mining sectors that wished to retain their labour force. It was an issue which was not unnoticed by the governments of the time, particularly as police and other officials were documented to have abandoned their posts to seek their fortunes gold mining (La Croix, 1991). The primary way for employers to compete for labour was to increase wages in other sectors (see Chart 1). These wage costs contributed to inflation within the fledgling colonies.

Chart 1:  Index of Victorian wages

Source: Maddock & McClean 1984

To combat the dramatic increase in wages, Colonial governments pursued a policy of mass migration to increase the labour supply to help reduce wages back to their original levels. While some migrants were unassisted, and able to pay their own way to Australia, the Colonial governments were able to use the revenues associated with the gold rush to encourage assisted migration and target people with particular skills that were in short supply.

Over the ten-year period following the announcement of the discovery of gold the Australian population expanded rapidly, growing from 430,000 people in 1851 to over 1.1 million in 1860 (ABS, 2008). The growth was even more pronounced in the colonies in which gold had been discovered. For instance, in Victoria, the population grew five-fold from an initial population of approximately 97,000 people to more than 530,000 in 1860 (ABS, 2008). While these policies did eventually lead to a reduction in the level of wages in the colonies, they never returned to their pre-gold rush levels (see Chart 1).

One of the characteristics of the population boom initiated by the gold rush was that that many of those who came were induced to stay. In part, this was because Colonial governments actively pursued a policy of increasing the demand for labour in the agricultural sector. This was achieved through a combination of policies, such as granting access to Crown land, which led to a rapid development of the Australian agricultural sector, and the wool industry in particular. Hence, at a time when many other countries experienced a reduction in their agricultural sector as their economies were transitioning to industrial and manufacturing-based economies, Australia expanded its agricultural labour. As a result of this transition Australia found itself well placed to take advantage of the increase in demand for food and fibres from other countries that were pursuing a manufacturing based approach to their economic development (Schedvin, 1987).

End of the gold rush

Subsequent to the initial discovery of gold in the New South Wales and Victorian colonies, a succession of discoveries were also made in the colonies of Queensland, Western Australia and Tasmania. As a result, gold production in Australia was not a transitory phenomenon at a national level and the gold industry continued to make a significant contribution to Australia’s economy throughout the nineteenth century. While production peaked in 1853 and 1856, when 3 million ounces were produced, production remained above 1 million ounces until the 1890’s (Maddock and McLean, 1984).

An expansion of the gold mining industry occurred with the discoveries of gold in Queensland and Western Australia. However, practical considerations associated with mining in arid regions, and the costs associated with overcoming them, acted as a barrier to independent and small-scale miners in a way distinct from earlier discovers of gold in New South Wales and Victoria.

Deregulation of the world gold market

For the majority of the twentieth century gold played a more indirect role in the Australian economy than the previous century. In January 1925, Australia returned to the gold standard as a means of restricting the money supply and reigning in inflation (Tsokhas, 1994). Given that many other countries were also operating on a gold standard, the market for gold was, at that time, tightly controlled by the worlds’ central banks with a number of restrictions placed on the ability of individuals to buy and sell gold. This in turn reduced the incentives for the exploration and mining of new gold deposits.

It was not until 1971, with the collapse of the Bretton-Woods gold-US dollar exchange system that gold entered a new growth phase. The move to a floating exchange rate meant there was no longer a need for the world’s governments to control private gold holdings. Consequently, in the United States restrictions that had been placed on an individuals’ ability to buy gold were relaxed. Similar restrictions were removed in other countries and the modern gold market came into existence (Allen et al, 1999).

Chart 2:  Nominal gold price, January 1971 to December 1980

Source: LBMA

The deregulation of the world’s gold market corresponded with a period of great instability in the world’s economy. High levels of inflation sparked by the oil price shocks of the 1970s resulted in a huge increase in private investment demand for gold as individuals sought to protect their wealth. This, in turn, led to a massive increase in the value of gold between the late 1970s and early 1980s. In the decade after the collapse of the Bretton-Woods system, the price of gold increased from US$35 an ounce to over US$600 an ounce in nominal terms.

The Australian gold industry shines again

The spectacular increase in the price of gold over the 1970s and early 1980s served as the impetus for a resurgence in the Australian gold industry. The dramatic rise in the price of gold resulted in substantial returns being obtained from investing in the Australian gold industry. Adding to these returns were technological advancements in both the exploration for, and mining of gold, that made the mining of lower grade ores economically viable. The combination of these factors led to a second boom in the Australian gold industry (Hogan et al, 2002; Hogan 2004).

Over the decade between 1981 and 1990 Australian gold mine production grew from 18 tonnes in 1981 to over 244 tonnes in 1990. The majority of this gold was exported as bullion, and gold, once again became an important component of Australia’s export portfolio. In nominal terms, the value of Australia’s gold exports grew from $56 million in 1981 to more than $3.4 billion in 1990.

Over the 1980s and 1990s, the price of gold trended downwards, in line with the prices of many commodities. As a consequence of this price trend, although Australia’s gold production continued to grow over the early to mid 1990s, it did so at a progressively slower pace. The gold industry was only able to remain profitable via the continual reduction of costs associated with the use of improved exploration technologies and mining techniques.

The Australian gold industry today

While gold is no longer Australia’s biggest export earner, it remains an important component of Australia’s export earnings.

In addition to the direct contribution to the economy via the national accounts, gold also provides a number of flow-on benefits. For instance, the majority of Australian gold mines are located in regional or remote areas, and thus, provide an important source of income and employment in these regions.

In summary, the discovery of gold in Australia was a turning point in its history and economic development. The revenue obtained from the gold discoveries of the 1850s enabled the Colonial governments of the time to embark on a path of rapid population growth via assisted migration. This population growth, in turn, contributed to the rapid development of the Australian agricultural sector and, in particular, the wool industry.

In a remarkably short period of time after the discovery of gold in Australia, Australia was transformed from a series of semi-independent colonies of the British Empire founded on penal labour, into a newly born Federation with one of the highest per capita incomes in the world. Today, gold still comprises a major component of Australia’s export earnings, contributing billions of dollars each year.

References

Australian Bureau of Statistics (ABS), 2008, Australian Historical Population Statistics 1998, Cat. No. 3105.0.65.001.

Allen, C., Brearley, T., Clarke, A., Harman, J. and Berry, P., 1999, Australia in the World Gold Market, ABARE Research Report 99.8.

Gold Fields Mineral Survey (GFMS), 2011, Gold Survey 2011, Hedges House, London.

Goodwin, C. D., 1970, British Economists and Australian Gold, The Journal of Economic History, vol 30 No2, pp.405–426.

Hogan, L., Harman, J., Maritz, A., Thorpe, S., Simms, A., Berry, P., and Copeland, A., 2002, Mineral exploration in Australia: trends, economic impacts and policy issues, ABARE eReport 02.1.

Hogan, L., 2004, Research and development of Exploration and Mining, implications for Australia’s gold industry, ABARE eReport 04.3.

La Croix, S. J., 1992, Property Rights and Institutional Change During Australia’s Gold Rush, Explorations in Economic History, Vol 29 No. 2: 204–277.

Maddok, R. and McLean I., 1984, Supply-Side Shocks: The Case of Australian Gold, The Journal of Economic History, Vol. 44 No. 4: 1047–1067.

Schedvin, C. B., 1987, The Australian Economy on the Hinge of History, The Australian Economic Review, Vol. 20, No.1: 20–30.

Tsokhas, K., 1994, The Australian role in Britain's return to the gold standard, The Economic History Review, Vol. 47, No. 1: 129–146.

 

This is a MCA adapted version of an article by Adam Bialowas, first published in BREE Resources and Energy Quarterly – December Quarter 2011. The views expressed in this review are those of the author alone and not necessarily of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.