The Struggle over Australian Railways in 1890s: The Strange Economics of State Control vs the Ruthless Economics of Federal

By 1900 the six governments of Australia were in possession of the largest government planned and financed railway network anywhere in the world. These railways were easily the most significant capital works within the country; the amount invested in this network in NSW and Victoria was multiples of the capital in manufacturing. They constituted the largest employers in Australia, and they reported net profits. Given the stakes, it is not completely surprising that there was much contention over them when it came to creating a new level of government in the end of 1890s; the Commonwealth of Australia. Which government would control these spacious assets? The States? Or the Commonwealth? Or, perhaps, the States under the supervision of a Commonwealth instrumentality? These questions roiled the Australasian Federal Convention of 1897-8, and left a definite impress on the Constitution that resulted. This paper analyses the economics of the confrontation railway networks of the two largest states, NSW and Victoria, and evaluates the impacts on economic welfare of two alternatives; State control and Commonwealth control. The paper uses a Leviathanical modelling of government to argue that Commonwealth control would remove certain social losses arising from State management of the railways, but that the beneficiary of their removal would be exclusively the Commonwealth. The community at large would be harmed by Commonwealth control. Better to have control dispersed to competing, if resource wasteful, governments of NSW and Victoria, than monopolised by hard charging the Commonwealth.