History's big lessons for Australian investors
Being on the winning side of war has played a major part in Australia’s financial success.
Australia has the world’s richest people, and its stock market has outperformed almost any other over the past century. How have we done it?
Abundant natural resources have played a part. But it can’t be the only answer as there are plenty of mineral-rich countries that remain poor.
Democracy has played a role too. Yet it can’t be the sole reason either as there are many long-standing democracies, such as India, Costa Rica, and Colombia, which haven’t grown rich.
Capitalism has been a factor, though there are lots of capitalist countries such as Thailand and India, where wealth has proved elusive.
I’d argue the biggest, and most overlooked, reason behind Australia’s economic success has been war. More precisely, being on the winning side of global wars.
To understand why, let’s go back in time to the start of 1942.
The bombing of Darwin
Australia’s position at that time was precarious. The Pacific War had started. Japanese aggression had led to American trade sanctions. Japan relied on the US for 80% of its oil, and without that oil, it would struggle to survive, let alone conduct a war.
Japan thought attack was the best form of defence and decided to bomb Pearl Harbour in December 1941. Soon after, America declared war on both Japan and Germany. And Australia’s Prime Minister, John Curtin, made his famous speech that Australia ‘looks to America’ for protection against the threat from Japan. By implication, Australia couldn’t rely on Great Britain for protection any longer.
Curtin had a right to be worried as Japan was also headed for the nearest supply of oil in Java, Indonesia. And Darwin was the major supply base for Java. It was obvious that Darwin and Australia were Japanese targets.
On February 19, 1942, Japan air force captain Mitsuo Fuchida was commanding a force of 188 aircraft for a raid on Darwin. Fuchida had already earned a sterling reputation having led the attack on Pearl Harbour. With precisely the same planes and air crew, he was headed for Darwin.
As Peter Grose notes in his superb book, An Awkward Truth, Fuchida had gotten lucky as it was an unseasonally fine day. But Fuchida was smart too: he led the planes from the north and east of the city, where they’d be harder to spot against the tropical morning sun. He suspected that Darwin wouldn’t expect an attack from that direction, and he turned out to be right.
The first bombs detonated in Darwin Harbour just before 10am.
It was the first wartime assault on Australian soil. It led to the worst death toll from any event in Australian history. The best estimates are around 300 people died.
The bombs damaged three hospitals, flattened the police barracks, the Post Office, and shops. The harbour and wharf were left in tatters.
Fuchida and his men had made mistakes at Pearl Harbour that they didn’t want to repeat. Consequently, more bombs fell on Darwin than Pearl Harbour, more civilians were killed, and more ships were sunk.
Fearing an invasion, half of the city including some in the military headed south towards the Adelaide River, in an event that became known as the Adelaide River Stakes. It led to accusations of people deserting the defence of Darwin, an unforgivable act in a time of war. Paul Hasluck, then Australian Minister for Territories, later gave a speech where he described February 19 as ‘not an anniversary of national glory but one of national shame. Australians ran away because they did not know what else to do’.
In the aftermath of the bombings, a Royal Commission blamed poor miliary preparations for an attack, and leadership failures thereafter. It also detailed the mass exodus of people from the city after the raid and subsequent looting that happened in Darwin. There were acts of heroism though from air force pilots, Darwin Harbour rescuers, and from Army and Navy gunners.
The Japanese attack on Darwin didn’t end that day. Darwin endured another 64 attacks over the next 21 months. The attacks were part of an air raid in northern Australia which also involved other areas including Broome, Townsville, and Port Hedland. The attacks grew less frequent as Australian and American fighter pilots got the better of the Japanese.
The fortunes of the Pacific War started to turn a few months after the Darwin raid. In May 1942, US, Australian and British forces prevented an invasion of Port Moresby in the Battle of the Coral Sea. And the war turned for good in the Battle of Midway in June 1942. Japan didn’t win another major battle after that.
What if Australia had lost the war?
Without American help, Australia would have been in diabolical trouble. It’s hard to imagine the consequences if the Allied Powers lost the war.
Recently, a television series, The Man in the High Castle, has adapted a famous novel by Philip Dick, exploring an alternative history where Japan and Germany win the war. Set in 1962, the story depicts a partitioned United States, where Japan rules the Pacific states, Germany rules the east, and there’s a neutral zone in the centre encompassing the Rocky Mountains.
The Man in the High Castle is a mysterious character who’s the author of newsreels (it’s a novel in Dick’s depiction) entitled The Grasshopper Lies Heavy, which shows Germany and Japan losing the war. The series follow the political intrigues of Germany and Japan as they rule the US.
You don’t need science fiction to imagine the consequence of losing a war though. Germany’s GDP fell more than 50% in 1945, as the war left bombed-out buildings and starving people.
It’s not a stretch to say that many Germans went bankrupt three times in the first half of last century. The first time was after World War One and the Allies imposing severe wartime reparations on Germany, effectively making the country bankrupt. The second was the hyperinflation during the 1920s, which led to the rise of Hitler. And finally, at the end of the Second World War. It was only with America’s considerable help that Germany was able to recover from that terrible period.
Lessons for investors
The role of war in economy progress has been underappreciated. More broadly, there are other lessons for investors:
- A prosperous past doesn’t guarantee a prosperous future. Things can change quickly. Invest accordingly.
- A corollary is that having international exposure can be a good thing. It reduces reliance on one country for returns, and thereby reduces risk.
- Thinking about preserving wealth under all economic conditions is worth your time.
- Risk is what you don’t see, as writer Morgan Housel says.
James Gruber is an assistant editor at Firstlinks and Morningstar.com.au