By Ian Verrender Monday 27 October 2014

Photo: The conventional wisdom is that, from an economic perspective, the Whitlam government was a disaster, but this ignores how we fared compared to our peers. (Stewart McCrae, National Library of Australia collection)

What is never recognised is the Australian economy under Gough Whitlam outperformed its peers, most of which floundered during one of the most turbulent periods of modern economic history, writes Ian Verrender.

Time. It tends to blunt the edges, soften the memories and, for most of us, perhaps even heal some old wounds.

The generous and genuine outpouring of admiration and emotion following Gough's second Dismissal last week, much of it from unexpected quarters and old political adversaries, touched on an element of the national psyche that illustrates everything that is good about Australia.

As expected, not everyone could bring themselves to be magnanimous, to acknowledge the achievements, to recognise the profound impact of a man who forever removed us from a cloistered, claustrophobic and conformist era for which some conservatives still pine.

But as Winston Churchill once observed: "You have enemies? Good. That means you have stood up for something in your life."

The achievements of the nation's 21st prime minister were thrust to the fore all week; universal healthcare, education, law reform, women's rights and indigenous rights on the domestic front, on the global stage, his recognition of China.

But if there is one vulnerability, one chink in the Whitlam legacy and legend - apart from the shambolic ill-discipline within cabinet - it is in his government's handling of the economy.

And so began the venomous sniping, within hours of his passing, from a joyless handful forever confined to the shadows and whose anger and bitterness festers and feeds upon itself.

The conventional wisdom is that, from an economic perspective, the Whitlam government was an unmitigated disaster.

Certainly, the raw numbers bear that out. And there is plenty of evidence to support the notion that the new government believed economic management was a secondary consideration to its social agenda.

What is never recognised, however, is that the Australian economy under Whitlam outperformed its peers, most of which floundered during one of the most turbulent periods of modern economic history.

Former treasury secretary John Stone left no doubt about his sentiments - if doubt existed - in his Australian Financial Review piece last Thursday.

As Stone tells it, the economy only grew "superficially" between 1972 and 1975. Given the National Accounts do not record a measure of "superficial growth", presumably Stone means the economy did not experience a recession.

On every other measure, however, Stone claims the economy was in crisis. Private investment in dwelling and non-dwelling construction slumped, wages growth was out of control, peaking at 30.5 per cent in 1974-75, there was a rapid expansion of the public service and personal income tax grew 34.3 per cent in 1973-74.

Interest rates rose alarmingly, Stone recalls, while inflation peaked at 16.7 per cent in 1974-75. Investor confidence evaporated, he argues, with the All Ordinaries Index "tumbling 39 per cent between June 1972 and June 1975".

It is a damning assessment on any measure, given particular credence by his position at the time front and centre of the action.

Except ... there are a vast number of monumental omissions in Stone's piece, which a cynic may deduce was specifically designed to give the impression that the economic malaise of the time was a purely Australian experience, that we alone were on the slide due to the incompetence of the incumbent government.

As Stone rightly points out, Australia did not go into recession. What he fails to mention is that America did. So did the UK. And they were no ordinary recessions.

Both our northern hemisphere allies endured long and painful slumps, the chaotic fallout from which reverberated through the global economy, including Australia.

Not only that, inflation ran wild in both the northern hemisphere economic superpowers and throughout the developed world. It was a global recession that marked the dramatic end of the post-war boom.

This was the time of rampant stagflation, a rare phenomenon in economics where inflation and unemployment rise simultaneously. It's a nightmare scenario for policymakers. Raise rates to dampen inflation and you exacerbate unemployment. Try to fix the jobs crisis and you fuel inflation.

There were a number of factors behind the global recession.

The Bretton-Woods financial system - instituted after the war that tied the US dollar to the price of gold - collapsed in the early '70s, itself enough to engineer a significant slump in global activity. This followed attacks on the currency as the US ran up a constant series of balance of payments deficits.

The sudden collapse of the system and the immediate devaluation of the US dollar, which from then on became a fiat currency valued against other currencies, created havoc on trade and current account balances throughout the developed world.

Add to this that the Arab world had formed the Organisation of Petroleum Exporting Countries and in 1973 deliberately squeezed supplies.

The price of oil quadrupled between October 1973 and the following January. That's correct, energy prices rose 400 per cent in four months, sending shockwaves through developed world economies, underscoring the dramatic price rises that, in turn, fed through to wage demands.

Between 1973 and 1975, the Whitlam era, inflation in the UK grew from 7.4 per cent to 24.89 per cent - vastly higher than anything experienced in Australia.

Great Britain was wracked by industrial disputes. Miners walked off the job, coal supplies dwindled. So dire was the energy situation, UK prime minister Edward Heath instituted the three day week as commercial electricity users were restricted. Food queues formed.

America, meanwhile, endured its worst recession since the Great Depression between November 1973 and March 1975. While the unemployment spike was relatively short-lived inflation soared from a relatively modest 3.65 per cent in early 1973 to a 12.34 per cent peak at the end of 1974 before tapering off during 1975.

Stone's contention that the collapse in Australian share prices was an indictment of Australia's economic management may hold some merit. But again, we weren't alone. In fact the Australian decline in share prices was modest compared with those on Wall Street and London.

Described as the seventh worst crash on record, between January 1973 and December 1974, Wall Street lost 45.1 per cent of its value. In London, meanwhile, the FT 30 declined a massive 73 per cent.

Gough Whitlam's first two treasurers, Frank Crean and Jim Cairns, were widely criticised for their performances. Cairns, especially, appeared to be distracted by assets of another kind, and spending during his reign blew out spectacularly.

But Bill Hayden's budget, delivered shortly before The Dismissal, had many in the Opposition worried. It was a responsible document designed to bring inflation and unemployment under control.

Whitlam is not the first to be lashed by Stone. He quit as treasury secretary days before Paul Keating's 1984 budget and Peter Costello was lambasted for introducing the GST.

A close ally and informal advisor to Joh Bjelke-Petersen, Stone railed against Asian immigration and eventually joined the National Party, a party that until recent times strongly espoused protectionism.

Despite Stone's towering intellect and formidable qualifications, perhaps Whitlam's greatest mistake on the economy was to not recognise the failings of one of his senior bureaucrats, an insular man who, four decades after the events, still fails to grasp the impact the global economic upheaval had on Australia.

Ian Verrender is the ABC's business editor. View his full profile here.

Think Whitlam ruined our economy? Think again - The Drum (Australian Broadcasting Corporation)