Melbourne became an 'urban' place, as people built the first houses, workshops, docks and warehouses in the area, at the same time that the land around it became 'rural', as settlers transformed native vegetation into paddocks and pastures. The connection between Melbourne and its rural hinterland was one of mutual interdependence. Both city and country shared a common past and both reshaped each other: Melbourne, by providing the commercial and transport services and production inputs that farmers and pastoralists needed to produce commercially for overseas markets; and the rural areas, by producing the wool, farm products and minerals that created jobs in Melbourne. After pastoralists from Tasmania established a settlement at Melbourne, the wool industry stimulated the growth of the town as a financial centre that channelled British investment to pastoralists and as the headquarters of merchants who arranged exports of raw materials to British factories. It was these links with the countryside that shaped the nature and growth of the Melbourne economy before World War I.
The gold rushes accelerated Melbourne's growth and by 1861 the city's population was 125 000, more than twice that of San Francisco. By the 1880s, Marvellous Melbourne, with a population approaching half a million, was Australia's largest city. More than a third of the New South Wales wool clip was exported through Melbourne, and the city's commercial institutions organised trade and investment in areas as far afield as Broken Hill, northern Queensland, Fiji and New Zealand. As Graeme Davison writes, when Melbourne was dubbed 'the metropolis of the Southern Hemisphere' by a visiting Englishman, R.E.N. Twopeny, 'the title signified that Melbourne had acquired an overwhelming hegemony in its region ... [and] far from being a meek client of the hinterland, seemed to have become its smug proprietor'.
Melbourne was the metropolis at the apex of an urban system that included a very large number of local towns and a smaller number of medium-sized cities. The small towns provided simple goods and served the frequently occurring needs of primary producers, while the provincial cities offered a more complex range of goods and services, the demand for which arose intermittently. Towns at all levels of the urban hierarchy were linked to each other by railway and telegraph lines, which distributed tradable goods and services through agents and commercial travellers. Increases in primary output generated employment in local towns for shearers and farm labourers. The process of land settlement was spearheaded by local towns - storekeepers and publicans operated punts across rivers and offered credit to selectors - while the colonial parliament in Melbourne built railways and water supply schemes and provided other forms of assistance to rural producers. The prosperity of Melbourne went hand in hand with that of the smaller towns that did business with it. Before World War I, country towns enjoyed a 'golden age' of prosperity and civic amenity. Local manufacturers prospered and there was a wide range of stores (such as Wagga Wagga's Paris Emporium), commercial and professional services. There were fine residential areas, with lakes and public parks, in some towns linked to the centre by tramway networks, as well as local sporting, social and cultural institutions that were diverse and vigorous.
Much of the work that was done in Melbourne involved unskilled physical labour. The loading and unloading of ships, railway wagons and drays, and the delivery of building materials, food and drink, and firewood, involved heavy manual work. Roads, railways and drains were formed by men with picks and shovels. Builders' labourers carried bricks on hods. Timber was sawn and nailed by hand. Women worked as laundresses, charwomen, or as domestic servants. These non-tradable services could only be provided on the spot, which meant that as the city grew, so did its demand for labour. The high cost of migrating from Europe to Australia restricted the growth of the labour supply, and when the migrants who could afford the voyage arrived and started spending money, they added to the demand for labour. Population growth also stimulated manufacturing, because products such as building materials and food and drink were too bulky and low in value to import. Factories offered employment opportunities for women, especially in simple trades like clothing and footwear. During the 'long boom' in the Australian economy, from around 1860 to 1890, Melbourne's economy was characterised by labour shortages and increasing real wages. Cheap food increased disposable incomes further.
This prosperity meant that a large proportion of the population could afford housing that, by contemporary British standards, made extensive use of land and building materials. The city was short of housing in 1860, but in the subsequent three decades the housing stock grew at a faster rate than population growth. Public provision of railways, water supply and, later, sewerage encouraged the spread of suburbs in which detached cottages were the standard form of housing. New suburbs were developed as farmland that was convenient to rail and tram routes was subdivided, even though there was still land and cheaper (if older and less spacious) housing available closer to the city centre.
Melbourne's prosperity during the boom years of the 1880s masked some inherent weaknesses in its economy. High urban wages benefited suburban developers and those in the building trades by creating a high level of effective demand for housing, but wage costs and the limited size of the domestic market choked off profits and discouraged investment in manufacturing. There was no substantial traded goods sector based in the city that could generate export income. Melbourne's economic fortunes remained to a large extent tied to the prosperity of a rural hinterland that, as Noel Butlin has explained, was growing more slowly by the end of the 1880s and as settlement was pushed into areas of lower rainfall and fertility. Suburban investment became increasingly speculative, as blocks were subdivided and provided with infrastructure well ahead of demand. Melbourne had by this time become overbuilt, and excess capacity in the housing and public transport sectors, falling wages, cutbacks in government spending and a slower rate of in-migration hit the city's economy hard. No other Australian capital city was as badly affected by the depression of the 1890s as Melbourne, and during that decade its population increased by only 5000.
When general recovery came it was based on export-led growth. As a result of increased world demand for primary products and new technology that improved productivity in wheat-growing and made exports of meat and butter possible, the decade before World War I was one of prosperity for most Australian farmers. The resumption of population growth - Melbourne grew from 478 000 inhabitants in 1901 to 593 000 in 1911 - and the application of protective tariffs encouraged the growth of import-replacing manufacturing. During World War I, the disruption of world shipping encouraged Australians in heavy and light industrial production to fill the need for arms and military equipment. Manufacturing now began to stimulate urban growth in its own right, and in the 1920s and 1930s manufacturing prospered in clusters of industries that grew rapidly around new technologies of electricity and the internal combustion engine. Protective tariffs stimulated the growth of local manufacturing industries and encouraged foreign companies to establish branches in Australia to avoid the tariff barrier. Tariffs boosted the incomes of those in protected manufacturing industries and reduced the incomes of exporters, thus redistributing income from rural to urban areas, from small States to large States, and from small towns to large cities.
By the post-World War I period, when Victorian country towns began to build cinemas, sewerage works and other symbols of modernity, technological and global forces, beyond the control of governments, were at work that would undermine the economic base of those towns. The traditional link between farm output and economic activity in the local community was becoming weaker. Local manufacturing, which had thrived when technologies were simple and transport costs were high, was struggling to survive. Technological change in the flour-milling and brewing industries made it difficult for small-town firms to compete with metropolitan ones that could achieve economies of scale. Railway networks enabled big city firms to do business in rural areas, through commercial travellers. Motor cars and better roads, which made it possible for farming families to shop and do business in larger centres, were also to the disadvantage of small towns. They enabled use of the wider range of professional services, especially health care, that was available in larger regional centres. Rural consumers were no longer restricted to what local towns had to offer and could now make their choices in larger centres where retailing was more diverse and competitive. As the 20th century unfolded, the changing demands of the farming sector, in particular for technologically complex purchased inputs, shifted farm spending from firms close to the farm to those in more diverse regional centres. Servicing of these inputs was also less likely to be done in small towns. The use of non-local sources of finance and farm labour meant that a proportion of farm income leaked from local regions in the form of interest payments and wages.
Between the censuses of 1921 and 1947, Melbourne recorded a net increase of over half a million inhabitants, from 718 000 to 1.2 million. During these years, the major influence on the location of residential areas and jobs was the networks of rail lines linking suburbs to central business districts and dockside areas. Jobs tended to be located in the Central Business District and its dense inner-city core. A general view emerged among social reformers and policy-makers, not only in Melbourne but elsewhere in Australia and overseas, that old, rundown inner-suburban housing needed to be cleared away and new, spacious suburbs opened up if urban problems were to be avoided. Melbourne seemed to be particularly favoured in this regard; it had an extensive public transport network and electrification and track improvements enabled train and tram commuters to travel greater distances in a given amount of time. As the suburban frontier was pushed out to Coburg, Preston and Heidelberg in the north, Box Hill in the east, Oakleigh in the south-east, Mordialloc in the south, and past Footscray in the west, land that had been vacant since the boom of the 1880s was covered with Californian bungalows. Shopping strips developed near railway station and tram terminuses, some of them, such as at Hawthorn's Glenferrie Road, with department and other stores to rival those of Central Melbourne. These suburbs were built in a way that people could get around them on foot, or by taking public transport. There was a marked absence of pollution and overcrowding. Beyond easy walking distance of public transport, the land generally remained undeveloped.
As Melbourne sprawled, it demanded a bigger slice of public capital formation than had hitherto been the case. Before 1900, public capital formation had been dominated by railway construction, which served mostly rural interests. In the 20th century road improvements, bridges, water and sewerage took increasing shares, and this was to the advantage of suburban developers and manufacturers, who sought the economies of scale and transport advantages of a metropolitan location. Ironically, the governments that had sought to promote closer settlement ended up financing the infrastructure needed by growing suburbs.
During the second 'long boom' in the Australian economy, from about 1940 to the early 1970s, economic growth was spearheaded by investment in manufacturing. Manufacturing had accounted for 31% of Melbourne's workforce in 1901, and the figure had increased to 40% by 1947. Melbourne added a further 700 000 inhabitants over the next 20 years (to reach a population of 1.9 million in 1966), and the metropolitan economy generated enough new jobs in manufacturing for the sector to almost maintain its share of the total workforce. Although most State governments tried to encourage a decentralised pattern of industrial location within their own States, they nevertheless competed with each other to attract large firms that sought the economies of scale that were available in major cities such as Melbourne. The program of assisted immigration underpinned the expansion of manufacturing by providing both workers and consumers, and the economic effects of immigration were strongest in the capital cities where most manufacturing employment was located. By the 1960s the attraction of Melbourne and Australia's other major industrial cities to manufacturing had reasserted itself. These cities were able to expand their industrial base further by creating new industrial areas in their outer suburbs. In Melbourne, the industries that needed plenty of space for large, single-storey buildings and easy access to main roads found it at places like Dandenong and Broad-meadows. People followed the factories out to the suburbs, and investment in housing and associated amenities, such as schools, added to the economic momentum.
At the end of World War II, there was still plenty of vacant suburban land within walking distance of public transport routes. But the postwar expansion of Melbourne would be dominated by the car. Rising incomes, low unemployment and cheaper cars fuelled a boom in automobile ownership: in 1945 there was one car for every 14 Victorians; by 1960 there was one for every five. Trucks freed factories and other workplaces from the need to locate close to railway lines. Cars pushed suburban development out beyond the public transport terminuses and allowed new areas of housing to be built in the gaps between train and tram routes. The decentralisation of employment within capital cities required many workers to become cross-town commuters, something that was generally difficult using public transport. Once people began to use their cars for commuting and new suburbs began to develop away from public transport routes, a fresh set of urban problems emerged quickly. Fast unplanned growth was characteristic of the new suburbs, and for a long time many of them lacked sewerage, drainage, schools and other amenities. The volume of traffic throughout metropolitan areas was increasing but there was a shortage of good roads. This increased both the private costs of motoring (by increasing commuting times) and the social costs of motoring (through increases in traffic jams, accidents and pollution). There was a general consensus among planners, visiting American experts and editorial writers that new, high-capacity roads were needed if getting people to work was not to become a logistical nightmare, but by the mid-1960s this remedy had become unpopular with the community in general. When a Melbourne Metropolitan Transportation Committee proposed in 1969 that 491 km of new freeways be built, many of which would have slashed through existing housing, shopping, and parkland areas, public protests, supported by sympathetic trade unions, prevented the freeway plan from going ahead.
For the first three-quarters of the 20th century, Melbourne's economy, like that of the rest of Australia, was influenced heavily by a set of Commonwealth policies that were designed to distribute national income in ways that accommodated the nation's conflicting interests. In the years immediately after Federation, Australia developed a series of laws and institutions that would dominate political life until the 1980s. Support for ideas about the desirability of restricted immigration (the White Australia Policy), protecting and assisting industries, the basic wage and arbitration, a reliance on government for the provision of infrastructure and improvements in welfare, and the maintenance of strong ties with Britain, was bipartisan and was accepted by Conservative, Liberal, Country Party and Australian Labor Party politicians. A reliance on manufacturing, boosted and cosseted by high levels of protection and regulation as the key source of economic growth, was characteristic of what is now called the 'old economy'. The main burden of this protection fell on the efficient export sector - chiefly wool, wheat, and minerals - by raising its production costs. Heavily protected industries had an incentive to produce mostly for the domestic market, as in export markets the assistance of protection did not apply. In times of economic growth, when conditions in the world economy and growing conditions in Australia favoured primary exporters, protection did not impinge unduly on Australian living standards. The efficient sectors of the economy could afford to carry the burden of protected manufacturers and small-scale rural producers, the smaller markets and higher labour costs that resulted from restricted immigration, and the cost pressures of regulated labour markets. But in times of slower productivity growth and less favourable conditions in overseas markets, protection in one industry was likely to lead to losses in others. In good times the Australian economy never reached its full potential; in difficult times the economy was sluggish and slow to respond to challenges.
These defects were magnified by the development from the mid-1970s of a globalised 'new economy', based on internationally deregulated labour, financial and capital markets and liberalisation of trade. In a global economy, in which international investors and financial markets could regularly assess and reassess the flexibility and cost structure of the Australian economy, it became increasingly costly to continue providing high levels of protection and regulation. In the face of declining commodity prices (a global trend since World War I, broken only by the post-World War II boom), the primary export sector became less able to carry the burden of protection. Australian Commonwealth governments adjusted to these new realities by broadly deregulating the financial system, floating the dollar, reducing the level of tariff protection, introducing a wages accord, and initiating microeconomic reform. Public industries and utilities at all levels of government were privatised and deregulated, and there was a focus on improving productivity and efficiency in many areas of government activity.
These changes automatically affected Melbourne's economy. They created investment and job opportunities in a broad range of industries, such as research and development, transport and distribution, business services, information technology, retailing and high-value manufacturing. In the 'new economy', the offices of an information age have replaced the factories of the industrial age as key generators of wealth, where skilled workers process and transform information, rather than raw materials, into products (which may be manufactured or finished offshore). In Melbourne, many of these new workplaces are located in the Central Business District or in the old inner suburbs, as old buildings have been demolished or remodelled to accommodate new uses. This has encouraged a movement of affluent young people to inner-city neighbourhoods that were once seen as areas of disadvantage. But many of the new jobs have also been created in the suburbs, either concentrated in 'edge cities' around shopping malls and business parks, or scattered in smaller areas of retail, office and industrial space on small sites close to main roads throughout the metropolitan area. The dispersal of jobs has allowed many workers to live within a reasonable commuting distance of the areas where the spacious housing and big backyards that most families desire are affordable. In the mid-20th century, the average Melbourne commuter was likely to be male, travelling by public transport to and from a full-time job in or near the Central Business District; in the early 21st century, a commuter selected at random is as likely to be female as male, will probably be travelling by car in one of a number of directions, to a workplace where his or her job may be part time or casual. These changing patterns of job location, together with reduced levels of government spending on urban amenities, have created new areas of disadvantage where people have inadequate access to education and training, and where new job creation has been sluggish.