Capitalist economies typically experience cycles of rapid growth followed by slower growth or stagnation. Economists define depressions as periods when the output of the economy shrinks for a significant period of time rather than grows. The factors of production - workers, workplaces, machinery and land - are no longer fully employed. Depressions are crises of capitalism. Because cities are concentrated sites of production, with factories, offices and retail establishments in close proximity to each other, the impact of a depression is also concentrated. Melbourne was a creation of international capitalism, founded to facilitate trade in food and raw materials between Australia and Britain, so whenever the economic system faltered badly the city suffered severely.
Melbourne has experienced two great depressions. Following hard on the heels of the speculative land boom, the depression of the 1890s was deeper and lasted longer in Australia than elsewhere in the world and Melbourne was its epicentre. As the inflow of foreign funds that had previously underpinned expansion dried up, companies and governments stopped building housing, roads and railways and the economy contracted swiftly and savagely. A loss of confidence in many minor financial institutions led to their failure. This developed into a run on the major banks, most of which were forced to close their doors for a time in 1893 in what was Melbourne's worst-ever bank and financial crisis. This financial collapse deepened the economic crisis. The only major public work for which finance could be found was the building of the city's much-needed underground sewerage system, which only created a few thousand jobs. By 1893, 28% of trade unionists were unemployed but probably more than a third of Melbourne's breadwinners were without work. In an economy dependent on wage-earning, disruptions of this magnitude were bound to have a traumatic impact. There was no poor law in Victoria so the destitute turned to private charities that were soon overwhelmed by the magnitude of the disaster. Families without wages found difficulty paying rent or making mortgage repayments. Building societies and banks became unwilling landlords on a massive scale as they repossessed houses from defaulters, with one in 10 of Melbourne's houses falling into their hands. The metropolitan population declined for some years after many unemployed left for the new goldfields in Coolgardie and Kalgoorlie.
The horrors of the depression seemed worse to many contemporaries because it followed so closely the optimism and the excesses of the land boom. Some believed this to be divine retribution and recoiled from what they saw as the excesses of urban life. A more practical outcome was an increased concern for low-paid workers. With the power of the unions largely destroyed, there was an increasing willingness to look to legislative solutions to alleviate distress. In some of the lower paid industries wages boards were established to set minimum wages on the basis of need rather than the ability of an industry to pay.
The second great depression started at the beginning of the 1930s. It differed from the first in that it did not follow on from a speculative boom. Rather, the Australian economy had been performing hesitantly for several years with slowing growth and rising unemployment. Nor was it accompanied by a financial crisis, although elsewhere, especially in the USA, there were widespread bank collapses in what quickly became a worldwide crisis of capitalism. However, it was similar to the earlier depression in that the Australian economy had once more become heavily reliant on British investors to finance its continued development. Once they stopped investing, the level of economic activity in Melbourne shrank alarmingly as it had done 40 years earlier.
By 1932 unemployment had reached levels almost identical to those experienced in 1893. Of the many countries in the throes of depression only war-ravaged Germany suffered higher unemployment than Australia. The incidence of unemployment was uneven. Melbourne suffered more than the rest of Victoria, and men more than women. The unskilled suffered more than the skilled and Catholics more than other religions. More than half of all building workers lost their jobs compared with less than one in eight professionals or public authority employees. Poorer suburbs were hardest hit, as were people aged 20-29 or over 40. By 1933 almost a third of all unemployed men had been without work for three years. Private charities again quickly proved unequal to the task. Governments began relief works. Sustenance or 'susso' was paid in kind to eligible unemployed. Later they were put to work creating suburban parks, the Yarra Boulevard, the Shrine of Remembrance and other public works. There was much discussion about 'equality of sacrifice'. Wages fell and taxes rose, but because of deflation many of those who remained in full-time work found themselves better off in real terms as their wage would buy more.
There was much debate as to the most appropriate way to counteract depression, but government policy was largely determined by Australia's indebtedness to British investors. Rather than running deficits in an attempt to stimulate the economy, Commonwealth and State governments followed the conservative orthodoxy, giving priority to repayment of debt and slashing already greatly reduced public expenditures in an attempt to balance budgets. This approach deepened the depression and delayed recovery significantly. A resurgent manufacturing sector eventually brought prosperity again to some of Melbourne's industrial suburbs that had suffered so badly, but it was not until World War II that unemployment disappeared. The experience of the 1930s depression had a profound effect on social policy in Australia for the next half-century. The maintenance of full employment became a central objective of government policy for the first time. This was largely achieved until the 1970s, with governments applying the insights of the economist J.M. Keynes to manipulate the level of aggregate demand in the economy.
Melbourne has also periodically suffered from recessions, temporary downturns in the level of activity that have led to unemployment of the kind most recently evident in the mid-1970s, the early 1980s and the early 1990s. Linked with long-term structural adjustments associated with the decline of manufacturing, they created high unemployment in areas where manufacturing had been concentrated, especially in northern and western suburbs.