Sumner J. La Croix
University of Hawaii

As well might it be attempted to confine Arabs of the desert within a circle drawn of the sands, as to confine the graziers of wool-growers of New South Wales within any bounds that can possibly be assigned to them, and as certainly as the Arabs would be starved so also would the flocks and herds of New South Wales, if they were so confined, and the prosperity the colony would be at an end.

Sir George Gipps, Governor of New South Wales, December 19, 1840

At the founding of the Botany Bay settlement in 1788, the British colonial government in Australia claimed all lands for the Crown. For the next 60 years the British government experimented with a wide variety of land allocation methods. The government's policy was directed toward concentrating settlement within a relatively small land area and financing immigration from Britain. After 1830 settlers largely ignored the government's policies and raced to begin grazing sheep on the enormous tracts of closed land beyond the official settlement area. This paper's goal is to document and analyze the colonial land policies in Australia with the tools of modern economic theory and to understand how the changing economy then induced changes in land rights. The paper begins by outlining the evolution of land policies from 1787 through 1847. The settlers' rush to occupy restricted land during the 1820s and 1830s is reviewed and the analysis identifies important factor motivating changes in land policies during the 1830s and 1840s and briefly traces the change in government incentives and land policies as sheep farmers became its dominant constituency in the 1840 s and briefly traces the change in government incentives and land policies as sheep farmers became its dominant constituency in the 1840s.

I. Land Policies in New South Wales: 1788-1847

Australia's land policies usually emanated from the British Colonial Office, but it was Australia's colonial governors who implemented and often modified the policies to fit the reality of local conditions. It is important to note this "agency" relationship immediately, as many of the policies emanating from London were ill-suited to the conditions of the colony (Burroughs, 1967). Correspondence between Australia's Governors and ministers in the Colonial Office reveals a continuing tension between London's interest in concentrating settlement and Sydney's interest in developing the country. Between 1788 and 1847 there were numerous changes in the land system (Abbott, 1971), and the account provided below highlights only the most important changes.

When the first colonists arrived in Australia, the Governor of New South Wales (NSW) had been given the authority to make land grants to free settlers, emancipists (former convicts) and noncommissioned officers. Land grants usually stipulated that a quit rent of one shilling per 50 acres be paid after five years, that the grantee reside on and improve and cultivate the land, and that timber "deemed fit for Naval reserved for the use of the crown." Governor Macquarie placed a clause in each land grant forbidding the settler to sell the grant for five years. Settlers usually ignored these restrictions, and the colonial government made little effort to collect quit rents. Governors made only small amounts of land available for settlement, as less that 1,000 square miles (32 miles square) of land had been granted when Governor Macquarie left office in 1821. At the beginning of 1821, Macquarie decided that land grants should be proportional to a settler's capital, subject to a maximum grant of 2,000 acres. Immigrants bringing more than �3,000 to the colony could, however, purchase additional land.

Governor Brisbane's land grants during his four years in office virtually doubled the total amount of land in private hands. In April, 1822 Governor Brisbane instituted a new land policy requiring that the grantee agree to maintain one convict per 100 acres; grants were now restricted by the number of convicts available to be maintained. To expand the amount of land available to settlers Brisbane announced that settlers could purchase (with his permission) up to 4,000 acres at a minimum price of 5s an acre (with superior lots priced at 7s 6d). Governor Darling took office in December, 1825 with instructions from the colonial office to reduce the use of land grants and to move toward a system of land sales. In September, 1826 Darling eliminated the requirement to maintain convicts and instituted a system of land grants to new settlers of moderate means and land sales at fixed prices in lots of 1920 acres. A shortage of land surveyors forced Darling to suspend land sales in November, 1826 and until 1831 grants were virtually the only mechanism for obtaining crown land.

In 1829 the government issued regulations strictly limiting settlement in NSW to the 22,082,200 acres in the Nineteen Counties surrounding Sydney. This prohibition on settlement was followed up with the "Act for Protecting the Crown Lands of this Colony from Encroachment, Intrusion, and Trespass" which allowed the Governor to appoint commissioners of crown lands to enforce crown property rights against squatters.

The experiment with land sales in 1826 foreshadowed major changed in land policy in 1831. The intellectual trigger for the change came in 1829 with the publication of Edward Gibbon Wakefield's tract, Letter from Sydney (where he had never visited; the book was written from his cell in Newgate Prison in Britain). Wakefield argued that New South Wales lacked a sufficient labor supply because too many people were allowed to land. He advocated setting a high price on land to restrict land ownership and to increase the pool of labor available to land owners. The state would use the revenue from land sales to subsidize immigration from Britain, thereby relieving the colony's labor shortage. The British Colonial Office adopted many of his ideas when they issued the Ripon Regulations of 1831 which abolished land grants, replacing them with auction sales at a minimum upset price of 5 shillings per acre. Revenues from the sale of crown lands were to be used exclusively to finance immigration from Britain.

After settlers began to cross the Bass Strait from Van Diemen's Land and occupy pasture lands in Port Phillip, Governor Bourke convinced the Secretary of State for the Colonies, Lord Glenelg, to open Port Phillip to settlement and to begin land sales. In July, 1836 the Legislative Council relaxed its official policy of discouraging settlement beyond the boundaries of the Nineteen Counties by allowing individuals occupying these lands to obtain annual licenses. The licenses cost �10 per year. In 1839 the Legislative Council passed a new law imposing a tax of 1d. per annum for every sheep, 3d. for every head of horned cattle and 6d. for every horse, depastured on land beyond the Boundaries in addition to the �10 license fee. In 1838 Lord Glenelg wrote to Governor Gipps ordering him to raise the upset price on "ordinary" land to 12 shillings per acre. Gipps complied with his order in January, 1839.

In early 1840 the British Land and Immigration Commissioners recommended raising the price of land once again, and the Colonial Office issued a new set of regulations requiring land to be sold at a fixed price of �1 per acre in most areas of the colony. Gipps presented the regulations to the Legislative Council in December, 1840, prompting a flood of protest from landholders and politicians. In August, 1841 the auction system was reinstated, but in early 1843 the colony received the news that Parliament had passed legislation in June, 1842 raising the upset price at auction to �1 throughout the colony. At least 50 percent of the auction proceeds had to be spent on subsidizing immigration from Britain. In 1844 Gipps issued new regulations for grazing sheep on Crown lands which limited sheep stations to twenty square miles, required graziers to renew licences every 12 months, and allowed graziers to purchase land for a homestead. The 1844 regulations were strenuously opposed by the sheep farmers, with opposition being fueled by the depression of the mid-1840s.

Parliament's passage of the Australian Lands Act in August, 1846 established more secure rights for the sheep farmers by providing them with long leases and retaining the high upset price of �1. In 1847 an Order-In_Council provided for the division of NSW into 3 classes of land: settled, intermediate, and unsettled. Leases not exceeding 14 years could be granted by the NSW government to persons occupying unsettled land for more than 12 months. Rent was set at �10 per year with an additional �2 10s paid for each additional 1,000 sheep above 4,000. The Order also granted each sheep farmer a preemption right to purchase large portions of the run at a minimum price of �1 per acre. The leases did not allow the holder to cultivate or sublet the leased lands.

II. Australia's Great Land Rush: 1820-1840

Until 1813 settlers generally played by the property acquisition rules set by the government. This changed in 1813 when three young explorers crossed the Blue Mountains near Sydney and brought back news of a vast plain with scattered timber and adequate rainfall -- in short, lands suitable for sheep grazing. As new immigrants became aware of the enormous expanse of potentially productive pasture land, they set out for the bush to begin grazing sheep on tracts of land as far as 300-400 miles from Sydney. Expansion proceeded in all directions around Sydney, and most settlers obtained the governor's permission to settle the new lands. However, some stockmen pushed south to the Murrumbidgee River and north to the Macleay River without official permission. The "sheep and cattle mania" of 1826 signaled the beginning of a full-blown rush to claim unoccupied crown lands without obtaining a land grant.

In 1824 the government commission its first survey of the settled lands. Armed with the results of the survey, the government began gradually to define area of restricted settlement between 1826 and 1829. In 1829 it proclaimed the famous restriction on settlement to the Nineteen Counties, but there is no evidence that the pronouncement did anything to stop the flow of settlers to the bush. The graziers surely realized that the government had no means of enforcing its restrictions, and that the few forces available to the government were more likely to be devoted to maintaining security in Sydney and its vicinity due to the presence of a large convict population.

The transition from a system of land grants to an auction system with a high upset price on land neither stopped the growth of the pastoral industry nor the rush to settle new lands. In fact, it is probable that by making marginal lands in the Nineteen Counties too expensive to settle, the new land regulations actually speeded up the exodus to the unopened lands (Buckley, 1957). By 1839 there were 649 "stations" (sheep farms) outside of the restricted area. Many of the stations occupied vast areas, with stations covering 20-50 square miles being quite common. Throughout the 1820s and 1830s the discovery of new passes through the mountain ranges allowed settlers to scatter over 450 miles from Sydney by 1840. While most of the best lands in NSW had been occupied by 1840, during the next two decades settlers slowly filled in the less desirable lands.

From less that 30,000 in 1825, the number in NSW increased to approximately 1 million in 1848. In 1844 one-sixth (9,885) of the colony's population and two-thirds of the colony's sheep were located in the squatting districts. Wool shipments to Britain increased from 175,400 lb. in 1821 to 4 million lb. in 1835 to 26 million lb. in 1847 (Roberts, 1968; Kerr, 1962). The rapid growth in the sheep population, the squatting population, and the value of wool exports transformed the squatters from a small group illegally occupying Crown land into a major constituency of the colonial government. When the new land regulations of 1842 set a high upset price on lease, short leases for squatters, and increased station fees, the squatters organized to resist these measures. They hired a lobbyist in London to represent them before Parliament and enlisted the support of the British woolens industry which had be revived by the stimulus of cheap, high quality wool from NSW. With the passage of the Australian Lands Act in 1846, the squatters finally achieved the de jure property rights that had been denied them since the 1829 restrictions on settlement.

The Government's land policies can be categorized into four regimes. In the first regime (1787-1831) governors made land grants to settlers. In the second regime (1831-1836) the government sold land to settlers at auction; land sales were limited due to high upset prices that increased over time. In the third regime (1836-1847) the colonial government legitimized squatter holdings by issuing licenses to sheep farmers occupying crown lands beyond the Nineteen Counties. In the fourth regime (1847-1865) the government maintained high upset prices and awarded long-term leases to holders of sheep runs (farms). In our analysis below we analyze certain themes prominent in each of these periods.

III. Economic Development and Land Policies

The numerous changes in Australian land policy illustrate many important themes running through the modern discussion of property rights formation. Comparisons with U.S. nineteenth-century land policy are instructive, but it is important to remember that Australia was a colony and that the British Colonial Office had its own objectives when it formulated land policy.

A. Concentration of Population and Law and Order

One objective of the Colonial Office's land policies was to prevent dispersion of settlement over a large area. In July, 1834 Governor Bourke appealed to the Colonial office to extend the limits of settlement southward to Twofold Bay. The Secretary of State for Colonies rejected the request:

His Majesty's Government are not prepared to authorize a measure, the consequences of whichwould be to spread over a still further extent of Territory a Population, which it was the objectof the late Land Regulations to concentrate, and to divert for a distant object, not immediatelynecessary to the prosperity of the Colony, a portion of its Revenues, the whole of which is barely sufficient to maintain in that state of efficiency, which it is so desirable, the various Establishmentsand Institutions required by the Inhabitants of the Districts already occupied.

The Secretary's rationale for concentration of settlement is very different from those offered by modern economists. Barzel (1989) and Allen (1991) have emphasized that governments have incentives to restrict settlement to limited areas to reduce the cost to government of providing protection to the settlers. The Colonial Office consistently emphasized the importance of maintaining law and order in a colony which had continuously received convict shipments from Great Britain's prisons since its founding. Britain's interest in minimizing subsidies to its prison colony provide a justification for its interest in this matter.

Allen has argued that restricted settlement areas allow a government to meet its "obligation" to provide protection from attack by groups outside the society. He cites the potential for attacks by Indian tribes on settlers at the American frontier as one rationale for the U.S. restricting the scope of allowed settlements. The threat of organized attacks by aboriginal groups in New South Wales was, however, generally much lower than in the United States. While there are records of sporadic attacks on settlers, aboriginals were at a distinct disadvantage in terms of numbers and weaponry. Moreover, attacks by aboriginals would surely have been considered in cost/benefit calculations by prospective settlers. Yet it is interesting to note that after the government provided limited recognition of squatters' rights in 1836, the squatters quickly complained of attacks from aboriginals and demanded additional police protection.

La Croix (1992) has suggested that governments may desire settlement concentration because it reduces the costs of collecting taxes on settlers. This consideration was particularly important in New South Wales, as the original land grant system provided for grantees to pay quit rents to the colonial government. In addition, tax collection is a labor-intensive enterprise, and in land-rich, labor-poor New South Wales, the government had incentives to structure the land system to reduce the amount of labor devoted to collecting taxes.

The Secretary's rationale for settlement concentration, that it is necessary to support public institutions, could be consistent with the tax collection hypothesis or could be based on an externality argument. There is some indication that the Secretary was implicitly making an externality argument:

With concert and mutual assistance, the result of the same labor would probably have beena greater amount of produce; and the cost of transporting it to market would have been a lessheavy item in the total cost of production. A different course has, however, been pursued, chiefly, as it appears, owing to the extreme facility of acquiring land, by which every man hasbeen encouraged to become a proprietor, producing what he can by his own unassisted efforts.

An individual farmer would, however, choose a more distant tract of land only if the expected net revenues (adjusted for the higher transportation costs) were higher than the net revenues to be earned by selecting land from within the Nineteen Counties. Any social losses must be due to negative externalities imposed on farmers within the more concentrated area. One possibility is that expenditures on road are now spread over a larger area, and farmers in the concentrated area lose more than farmers beyond settlement limits gain. The government could, of course, act as a first-mover and make expenditures on public goods such that individual farmers are induced to make correct location decisions. Yet local governments are surely influenced by the presence of distant settlers and may make politically efficient and economically inefficient public good decisions. This may explain the intervention of the British Colonial Office with its incentives to minimize expenditures of tax revenue on the colony.

B. Wakefield's Theory, Concentration and Premature Settlement

Wakefield's booklet, Letter from Sydney, was dismissed by the British establishment upon its publication in 1829. Yet during the 1830s Wakefield's theories "won over the Colonial Office" and had enormous influence on Australian land policy (see Philipp, 1960). Wakefield begins by blaming the depression of 1828 (see Butlin, 1986) on the disorganized system of allocating crown land in the colony. He argued that land grants to new immigrants allowed them to become landowners "too soon." Capital could not be productively applied to the land unless labor was freely available. To prevent new immigrants from becoming landowners "too quickly," he advocated selling land at auction at a minimum upset price. Proceeds from land sales would be dedicated to fund subsidizing immigration from Great Britain. The system was self-regulating, for as land sales increased, more labor would be demanded; the proceeds from the additional land sales would then be used to bring more labor to the colony to satisfy the new demands. The critical element in Wakefield's theory is the upset price of land. If the Governor sets the upset price too low, then settlement will be too dispersed and economic development will suffer; and if the Governor sets the upset price too high, it will be a drag on the colony's economic development.

As many commentators (e.g., Burroughs) have previously noted, Wakefield's intellectual influence on British policy was considerable, and the influence of his followers on the Colonial Office between 1831 and 1846 was at least partially responsible for the maintenance of the auction system and its high upset prices.

Wakefield's emphasis on land sales at auction places him in the company of several modern theorists (Haddock, 1986, Anderson & Hill, 1990) who have also expounded on the efficiency of allocated government lands by auction. Anderson & Hill emphasize the inefficiency of requiring investment or use of the land in order to claim property rights to the land. They argue, correctly, that individuals will have an incentive to use the land prematurely (i.e., when production yields negative land rents) if use allows them to establish property rights over future, positive-valued income streams from the land. In the limit such investment would fully dissipate the value of rents from the land. By contrast, sale of property at auction would not occur until the present value of the land becomes positive. While this would also often occur prior to the date when production using the land becomes profitable, there would be no incentive for the purchaser to begin production prematurely.

Perhaps the main difference between Wakefield's model and the models of the modern theorists is Wakefield's insistence on the importance of setting the upset price. By restricting the amount of land available to immigrants, the upset price influences the supply of and demand for labor and keeps the private stock of land from expanding as rapidly as in Anderson & Hill's model. By contrast, in the Anderson and Hill model, the timing of sales has no effect on the discounted value of the revenue as long as the land is placed on the market prior to the time when its rent becomes nonnegative. Presumably the government would charge to the buyer the cost of defining the property rights and recording the transaction. Both models suffer, however, from some defects. If Wakefield's upset price is set too high, the land may not be brought into production even if the annual rent from the land is positive; the lack of sales in NSW after land became available at �1 per acre in the 1840s provides some indication of this.

Anderson & Hill's assertion that the timing of auction sales is irrelevant for the present value of government revenue also suffers from the defect of ignoring the revenue-augmenting role of an upset price. In a thin market without an upset price, the winner of a first-price oral auction pays the value placed on the land by the bidder with the second-highest valuation. A carefully set upset price can increase revenue if it is set above the second-highest valuation and below the highest valuation. Lord Goderich explicitly admitted that revenue was a major consideration behind the adoption of the 1831 regulations in his communication of the new regulations to Governor Bourke. In hindsight, however, it appears as if the upset price was set at too high a level, as sales outside of the cities stagnated during the 1830s and 1840s.

Wakefield's and Anderson & Hill's models both presume that the government has the foresight and the resources to survey its lands prior to offering them at auction and, more fundamentally, that it has discovered that it has productive lands. In New South Wales, government surveyors had difficulties keeping up with the demand for their services. If it was profitable to place most of New South Wales immediately into production, it would be inefficient to force sheep graziers to wait until the land had been surveyed. In this case efficiency would seem to dictate allowing the sheep graziers to occupy the land until it had been surveyed and then to offer it at auction. (Studies of the pastoral industry indicate positive profits from sheep farming if not from wool sales. Of course, profits may be negative initially if farmers have to prepare the land or acquire knowledge about sheep grazing over time.) One problem with this line of argument is that incumbent sheep graziers acquire "inside" information about the land and would have an advantage at the auction. Individuals who were foolish enough to outbid the grazier would surely be subject to the winner's curse.

C. Income Flows and the Coase Theorem

Field (1990) has recently questioned the application of the Coase Theorem to situations where changes in the initial assignment of property rights generate significantly different flows of income and expenditure. The evolution of land rights in Australia provides an interesting example of Field's analysis. The 1831 Ripon regulations in conjunction with the 1829 restrictions on settlement reflected the decision of the owner of the lands, the Crown, to restrict present use of these lands. If the Crown had been able to enforce its decision, the rapid growth of the sheep industry in NSW would not have occurred. The inability of the NSW government to enforce its property rights (given the enormous expanse of land, the high price of labor to the government, and the growing number and wealth of squatters) led to rapid growth of the pastoral industry. Shipments of wool from NSW to Britain enabled the woolen industry to substitute lower-cost Australian wool for German wool. A revived woolens industry constituted a British interest group that would defend the de facto rights of the sheep graziers to their occupied lands. The changes in land leases and rents in the early 1840s allowed the squatters, a significant economic and political force in Australia after their growth in the 1830s, to join with the woolens industry to place pressure on the colonial office to ensure that the newly established flows of high quality wool would continue. The 1847 Orders-In-Council provided more security to the squatters and ensured that the land would continue in wool production. In sum, the NSW pastoral industry nicely illustrates Field's thesis.