The "bearded men" are fortunate they happened to shroud the history of Federation in a cloak of triumphalism. It has managed to hide their ineptitude for a century now. Their lost opportunities include a Bill of Rights, a High Court and a wet noodle of an informal Constitution amongst others. There was another battle lost, though this in the Commonwealth halls of Melbourne. It was an epic battle; New South Wales vs Victoria, George Reid vs Alfred Deakin - it was the battle between Free-trade and Protectionism.

The Schism Between The Colonies

Before Geoffrey Edelston poached the South Melbourne footy club to Sydney, and well before a Melbourne Rugby League team won the Grand Final, there was a deep divide between the colonies of New South Wales (NSW) and Victoria. Rail gauges were of different sizes, the colonies leveraged tariffs on each other, public holidays were on different days and there were even quarantine restrictions between them.

During the American Civil War, New South Wales had supported the north, while Victoria had supported the south. The inter-state rivalry between New South Wales and Victoria has a long history. It could even get petty. Phillip Knightly writes;

In 1878, New South Wales announced that it was considering changing its name to Australia. It claimed the right to do so because not only was it the first Australian colony .... but more native Australians had been born there than in all the other colonies put together. Victorians could scarcely contain their anger. If New South Wales did this, said on MP, then would the Victorian Premier rename his state Australasia? 'No,' said the Premier 'because then New South Wales might well call itself The Southern Hemisphere'.

When the first referendum for Federation was held, New South Wales did not achieve sufficient majority. One of the reasons was because the colony was free-market and all the others were protectionist. The NSW Premier, George Reid, was for Federation, but not really. he got nick-named "Yes-No" for his speech where he proclaimed there was not an advantage for New South Wales in Federation, but that he would be voting yes anyway.

George Reid

Reid was born in Scotland in 1845. He was age seven when his family emigrated to Melbourne as part of the gold rush. Reid worked his way through the public service in NSW, becoming a barrister and finally heading the Attorney-General's department in 1878. In 1880 he resigned from the public service and won election in Eastern Sydney for the NSW Assembly.

Reid was a tubby figure, an easy caricature for the Bulletin in the 1880s. Alfred Deakin wrote of Reid;

Even caricature has been unable to travesty his extraordinary appearance, his immense unwielding jelly-like stomach always threatening to break his waist-band, his little legs apparently bowed under it weight to the verge of their endurance, his thick neck rising behind his ears rounding to his many-folded chin. His protuberant blue eyes were expressionless until roused or half-hidden in cunning, and a blond complexion and infantile breadth of baldness gave him an air of juvenality.

Deakin wrote that during the Federal Conventions. Deakin was good friends with Edmund Barton. After the failure of the first referendum in NSW, partly because of Reid's lack of enthusiasm for it, Barton ran against Reid in the NSW Assembly electorate for Eastern Sydney. Reid won, but the margin was small enough that Reid got some amendments to the Federal proposals which led to NSW having a large enough majority in the next referendum for Federation to go through.

Anti-Labor

These three political figures would find their early Commonwealth political careers entwined, along with a new and influential political entity, the Labor Party. The Shearers Strike in rural Queensland would change the dynamic of Australian politics. When the Shearers were starved out of their camps, penniless and broken at the hands of the Queensland government, constables and militia; they decided to band together as a political group. It was the beginning of what we now know as the Australian Labor Party.

The fledgling Commonwealth Parliament hadn't devolved yet into the two party duopoly of Liberal and Labor. The anti-Labor factions included the Protectionists and the Free Traders. The protectionists were represented by Edmund Barton and Alfred Deakin, while the Free Traders were typified by George Reid. Initially this led to unstable minority governments, reliant on the constant demands of Labor for slim majorities.

As an example of the volatility;

• William Lyne (Premier NSW) 1901 appointed and unable to form a government
• Edmund Barton (Protectionists) 1901 - 1903 minority
• Alfred Deakin (Protectionists) 1903 - 1904 minority
• Chris Watson (Labor) 1904 - 1904 minority
• George Reid (Free Trade) 1904 - 1905 coalition
• Alfred Deakin (Protectionists) 1905 - 1908 minority
• Andrew Fisher (Labor) 1908 - 1909 minority
• Alfred Deakin (Fusion) 1909 - 1910 coalition
• Andrew Fisher (Labor) 1910 - 1913 majority
• Joseph Cook (Liberal) 1913 - 1914 majority

Reid had serious reservations about the damage protectionist policies at the federal level would do to NSW's economy. Brian Carrol writes;

[Reid] likened free trade NSW joining the other five colonies, all Protectionist to varying degrees, to a teetotaller setting up house with five drunkards and leaving the question of beverages to be decided later by majority vote.

In the first elections of March 1901, candidates announced themselves as either Protectionist or Free Trade. The first Parliament ended up composed of thirty-one Protectionists, twenty-eight Free-traders and sixteen Labor members.

Reid did not get his majority and would not join a coalition with Barton and Deakin. The Protectionists established a minority government with Labor giving their support in return for concessions.

Minority Governments and Coalitions

The gap in members between the Protectionists and Free Traders continued to get smaller, in 1903 there were twenty-six Protectionists, twenty-five Free-traders and twenty-three Labor members. In April 1904, Labor was able to vote against Deakin, de-stabilising his minority government and leading to the establishment of the Chris Watson Labor government.

Up until this point the Protectionists and Free-traders had been opposition parties. But the Watson government had shown that there was a re-alignment in the Australian political system to Labor and anti-Labor. The Deakin protectionists stepped aside and formed a coalition with the Free Traders. George Reid became Prime Minister.

Reid survived the six month recess, but when Parliament returned: Deakin and Watson combined to remove Reid. The Free Trade Party was unable to enact any free-market legislation. From that point on the Protectionists became the dominant anti-Labor party. Deakin entrenching the Protectionists through a minority government with Labor support. Deakin joked that his most important phrase was, "Yes, Mr Watson".

Reid and Deakin did not get along, and there was no unified anti-Labor party until Reid retired from federal politics. Joseph Cook took over as head of the Free Traders and the Deakin Protectionists and Cook Free-traders combined into the Fusion Party - with Deakin leading it. This would later be the foundation for the first Liberal Party.

Protectionism

The inability of George Reid and the Free Trade Party to gain a majority government meant that Australia would pursue protectionist policies - policies which lasted until the 1980s. In 1901 the only federal revenues were from tariffs, the federal government getting their finger in the income tax pie did not come until 1942 and the John Curtin government.

The political thirst for protectionism was to continue through Hughes, to Lyons, to Curtin, to Menzies to Fraser. The first government to return to the economic liberal policies of the New South Wales colony was the Hawke government.

Did this protectionism hurt? In World War I, the United States and Canada industrialised, sufficiently to challenge Europe as the centre of the worlds economy. Australia's protected commodity markets meant that the industrialisation of World War I passed us by. In the 1930s we were left with government subsidised factories in an attempt to industrialise. World War II found us with our pants down as home production could not match our needs.

Conclusion

I have often remarked that the failure of Australian Federation is the failure of NSW. There was the chance there to create something as innovative and potentially as wondrous as the US Constitution was in 1787. NSW was the most powerful colony in Australia, politically and economically. It was the hotbed of Republicanism and free-markets in Australia.

But NSW was not able to influence the conventions toward a republic. Nor was it able to gain a majority in early parliament to make free-traders the dominant anti-Labor party. Sadly it was the Deakin style of monarchical federation, protectionist economics and minority politics that won.

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In the fiscal borrowing crisis that Australia faced in the Great Depression, Joseph Lyons, then assistant treasurer of the Labor Scullin Government, saw it a failing of national character if Australia didn't adhere to "Sound and Honest Finance" and only borrow what it could repay. This directed his actions in saving the Federal Government from defaulting on its fiscal bond obligations. The principle of "Sound and Honest Finance" worked well as a popular political policy. It was easily understood by the electorate, who other than large borrowings for a house, understood the money in - money out principle from everyday experience. Advocates of Free Markets and Free Trade don't have such an easy time, the principles are often abstract, and don't fall as easily into the day to day experience of most of the electorate.

Joseph Lyons

Joseph Lyons was born in Tasmania, he became Premier of Tasmania in 1923 in a minority Labor Government, which relied on the Nationalists for support. He won majority in 1925, but by 1928, with the depression beginning to weigh in on political calculations, he lost government and resigned. Lyons decided to run for a federal electorate, a deal which was sweetened by Jim Scullin, who promised Lyons a cabinet seat if Labor won the election. It did, and Lyons became the Postmaster-General.

It was in the Scullin government where Lyons helped defuse the bond issue. but when Ted Theodore returned to Cabinet, Lyons resigned, from both cabinet, and the Labor Party. Lyons remained in parliament and took over leadership of the United Australia Party (UAP), which was a newly formed fusion of Nationalists and former Labor representatives, backed by the Melbourne based, "Group". The UAP with Lyons took the helm of government in the 1933 election, and remained in power until Menzies lost government in 1941.

Lyons was known as "Honest Joe" and he came to federal government with a name for safe and solid economic policy, which at the time was called "Sound Finance". In Tasmania he had reduced government's expenses, reduced loans and raised taxes. This bought Tasmania's economic house in order. This style was very recognizable to voters, many practised each week in their home when managing family budgets. Don't spend more than what you have, reduce you exposure to risk from loans and try to maximise your income. That style of fiscal management rings clearly in the electorates.

Default and Civil War

Lyons' principle of "Sound Finance" brought himself and NSW Premier Jack Lang to clash. The federal government with its consistent anti-federalism had under-written loans to NSW. Lang campaigned on the principle that the workers should not have to pay for the failure of the banks and the market. As a consequence, he wasn't go to pay any loan, until the banks renegotiated with the NSW government on the terms of repayment.

Lyons saw this as violating "Sound Finance", not to mention making a cash strapped federal government liable for NSW's loans, so he tried to get NSW's income tax rolls to collect tax directly. Lang had these hidden and protected. During this instability, conservative militia such as the Old Guard and New Guard sprang up. The NSW Government suddenly had its own supporting militia, as well as the sworn allegiance of the NSW Police Force - who - courtesy of the depression had rifles, steel helmets and armoured cars.

The Lighthorse was moved to protect Canberra from a NSW invasion and the Australian military in Sydney was put on alert. The Federal and NSW governments came within an angels breadth of civil war. The Governor solved the issue, by sacking Jack Lang. this was the point that civil war could have started, if Lang had denied Phillip Games' authority; instead Lang said, "The bastards have sacked me. I am a free man." There was no blood on the wattle that day.

Enid's Fiduciary Lament

Things have changed however, now Credit Cards are sent through the mail unsolicited, through low interest rates money is the cheapest it has been in a long time, household savings rates are also low , and our Current Account Deficit continues to increase . Judith Brett argues that Keynesianism, which Ted Theodore proposed as a means to spend Australia out of the depression, eroded the value of "honest and sound finance" as a guiding government principle of economic management. Brett writes;

The gradual acceptance of Keynesianism which decoupled the logic of the household economy from that of the nation's also began to decouple the stability of the personality from the stability of the financial system.

Enid Lyons, the wife of Joe Lyons, and the first woman elected to federal parliament wrote on the erosion of honest finance and its replacement with the credit economy;

Neither Joe nor the thousands who heard him speak were conscious that within a few years a new theory of public finance would be universally accepted; that by 1960 the whole world would be fidicuary ... They [those listening to Joe Lyons] cheered for the better times they longed for and for which they were prepared to pay. They would take the hard way out of the depression but the honest one.

Home Econ 101

The political narrative of the home, and everyday experience is a powerful one that politicians ignore at their own peril. I am fond of saying that I would trust a plumber with the budget before I would trust a politician; which probably stems back to the household experience of honest finance. John Howard discovered this when Pauline Hanson and One Nation rose in popularity in Queensland.

Much of One Nations rhetoric and policies were based in honest finance, the kind of practical knowledge an owner of a fish and chips shop would have in spades. John Howard got schooled in both populism and a modern permutation of honest finance, losing the political narrative to One Nation. While Howard weathered the storm, it was the refugees in Woomera, Christmas Island, Nauru and other refugee camps that bore the brunt of Howard removing One Nation as a political force . Ironically he didn't focus on the honest finance policies, but instead the anti-immigration stance.

Pauline Hanson's maiden speech included ;

This country of ours has the richest mineral deposits in the world and vast rich lands for agriculture and is surrounded by oceans that provide a wealth of seafood, and yet we are $190 billion in debt with an interest bill that is strangling us. ... We have one of the highest interest rates in the world, and we owe more money per capita than any other country. All we need is a nail hole in the bottom of the boat and we're sunk. ...

Anyone with business sense knows that you do not sell off your assets especially when they are making money. I may be only `a fish and chip shop lady', but some of these economists need to get their heads out of the textbooks and get a job in the real world. I would not even let one of them handle my grocery shopping. ...

Reduced tariffs on foreign goods that compete with local products seem only to cost Australians their jobs. We must look after our own before lining the pockets of overseas countries and investors at the expense of our living standards and future.

While the first third of the speech was focused on Aboriginal Policy, and much of the latter part of the speech focused on isolationism and anti-immigration policies, the thread is clear in the narrative. She believes her policies to come from her own suburban experiences in managing money, business, entreprenuerism and provincialism. One Nation imploded, but its message was clear, if a political party can place political policy in the terms of the household economy and suburban experience - it will gain electoral support.

Free Trade and Open Markets

Andrew Leigh recently commented on Barnaby Joyce's recent comments on "sound finance" and his practical suburban experiences being translated to international and global affairs;

Senator Joyce seems to be a bright guy, representing rural Australians, who have most to gain from open trade. Yet even he seems to think like a mercantilist: not recognising that the largest benefits that a country typically receives from trade liberalisation are from opening its own markets.

Trade liberalisation doesn't translate well to the home econ 101 experience, sound finance, or the suburban experience. To many people deregulation means the local petrol station is changing hands and getting redecorated every six months. In the US a common quip is that deregulation has meant that the local bank on the corner changes hands four times a year.

While trade liberalisation has data to back these policies up, it does not translate quickly and easily to the everyday suburban experience, and where it does, it is often in an abstract manner. It remains of greatest appeal to academics and backroom party policies. Free trade, open markets and trade liberalisation needs to adopt the language of household and suburban experience so that it gets the same populist appeal as "Sound and Honest Finance".

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I normally only read The Economist when I am waiting at the airport. I got to read it front-to-back tonight; United Airlines lost my wife's luggage. There were two articles [behind paywall] on the laziness of trade talks in Doha. I think both articles misjudged neo-conservatism and the national conservatism that is being practiced in world trade now.

Institutions like the World Trade Organisation stem from the foreign policy of international liberalism. This is the philosophy of meta-national consensus through open communication and a forum for all to voice their concerns without the worry of violence or power imbalances.

Neo-conservatism, and its roots in seeking a permanent American hegemony, is based on power politics. One of the concerns of neo-conservatism was the erosion of the nation-state's sovereignty to meta and supra-national entities such as the United Nations, World Trade Organisation and International Court.

Neo-conservatism seeks to remove those influences and re-establish the nation-state as the primary source of power and sovereignty. In trade terms this has seen the rise of the bi-lateral trade agreement.

This enables power imbalances to in trade to manifest themselves in trade agreements between two countries. This is beneficial for the United States as they are such a powerful country. As The Economist notes;

Lawmakers (Congressmen) appear keener on bilateral trade agreements, in which America can dictate terms more easily than on multilateral compromises.

The US-Au FTA is a good example of this. A bilateral trade agreement is easy to get with the US as long as the other nation agrees to US intellectual property laws and agricultural quotas. Rather than free trade, they are managed trade in the more powerful government's interest.

The Howard Government has followed an Australian form of conservative nationalism. Through its policies it has tried to re-establish the authority and sovereignty of the nation-state as much as is possible. The Howard Government has also conducted a couple of neo-conservative nation-building operations independently - East Timor and the Solomons - as well part of a coalition.

As a consequence bilateral agreements are Australian policy, rather than ratifying trade liberalisation through WTO agreements. The Economist warns;

If the Doha talks go nowhere, the future of the multilateral trade system itself will be at risk. The efforts of trade officials are already shifting from the multilateralism that Doha represents to regionalism.

There are now more than 350 bilateral and regional trade talk deals, double the number of a decade ago, and many more are being negotiated.

If the Doha round collapses, regionalism, despite its unarguable economic inferiority, will replace multilateralism as the organising principle of global trade.

The Economist misses by calling it regionalism; its correct name is neo-conservatism in the US and conservative nationalism in Australia.

International liberalism is dead in the water as foreign policy or philosophy. Nation-states no longer support it. The increasing irrelevance of the WTO is a symptom of the change to neo-conservatist foreign and trade policies.

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Moisis Naim has an excellent op-ed in the Washington Post on free trade. Shame all the op-eds are not this level of quality. Naim writes:

So, what explains the surging trade flows? The short answer is technology and politics. In the past quarter-century, technological innovations - from the Internet to cargo containers - have lowered the cost of trading. And in the same period, an international political environment more tolerant of openness created opportunities to lower barriers to imports and exports.

The latter is most notable with former communist nations like China and Russia but Niam notes that tarriffs have dropped from an average of 30% in the 1980s to 10% today.

Naim that free trade agreements still have a place so that there are agreed upon rules of trade that are common amongst nations. He sees this as stopping power-trade where large nations prey on smaller ones through their economic power.

At Federation the big divide between NSW and Victoria was Free Trade vs Protectionism which played itself out in the national elections for many years until the ascendency of the Deakinist Victorians paved the way for the next eighty years of protectionism until the Hawk Government.

Sacha Blumen points out that the NSW Government has forgotten its economic roots once again and indulged itself in protectionism. Sacha writes:

What can one say? This will lead to NSW residents being subject to higher taxes and charges than necessary, and likely to lead to increased prices due to decreased competition to supply the NSW Government. One wonders how managers in the NSW Government will attempt to run their organisations efficiently given this protectionist policy.

Protectionism is a policy that needs to be resisted despite populist, nativist and nationalist urges.