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The establishment of a Commonwealth government in 1901 inaugurated a new era in the history of New South Wales. With a population of 1,354,846—more than one-third that of Australia overall—it was the most populous state. Important powers were handed over to the federal government, which progressively encroached on the state’s domain. Other changes affected the course of the state’s development. For most of the 19th century, New South Wales had enjoyed almost continuous progress, broken only by occasional setbacks. The first half of the 20th century, in contrast, was marked by the two World Wars and a worldwide depression in the 1930s. Besides creating widespread unemployment and precipitating the collapse of businesses and financial institutions, the depression produced a political crisis. The Labor premier Jack Lang, who had introduced major reforms after gaining office in 1925, threatened to repudiate payment on overseas debts. He clashed with the Commonwealth government and alarmed wealthy propertied groups, which gave support to a semi-militaristic movement, the New Guard. Tensions mounted, and on March 19, 1932, F.E. De Groot, a member of the New Guard, cut the ribbon opening the Sydney Harbour Bridge before Lang was able to do so. This was a highly symbolic gesture that was caught on newsreels and often replayed. Two months later, after Lang forbade government departments to hand over money to the Commonwealth, he was dismissed by the New South Wales governor, Sir Philip Game.

Despite the disturbances occasioned by war and depression, much was accomplished in New South Wales between 1900 and 1945. Labor held office for the first time, under premier James McGowen in 1910. He was succeeded by William Holman, who left the party in 1917 after it split over the question of whether conscription for overseas military services should be introduced. The party held office for most of the 1920s, but in the 1930s power passed to a coalition of the United Australia Party (later the Liberal Party) and the Country Party (later the Nationals). The Country Party was established in 1925 in New South Wales (succeeding the Progressive Party, which had been formed in 1919) to represent the rural interest. The state continued to control public works, law and order, and health and education. Important reforms were introduced, particularly in the field of education. The state system brought into being under Parkes was reformed after 1904 by Peter Board, the celebrated director general of education. He established Sydney Teachers’ College in 1905–06 and sought to ensure that teaching and courses were adapted to the needs of children. In 1911 he laid the basis for an improved secondary school system that was designed to cater to older students. Some of those who attended secondary school proceeded to the University of Sydney (1850), the oldest university in Australia. It too was expanded after 1900 and became a major centre of learning with an international reputation.

The educational reforms introduced after 1900 reflected a growing tendency on the part of the government to help its citizens. State intervention had been a feature of New South Wales history from the outset, for, in so large a colony, government alone possessed the resources to provide essential services. The emergence of the Labor Party gave additional stimulus to this tendency and pushed it in new directions. From the 1890s a welfare state gradually took shape. Old-age pensions were introduced in 1900 and later extended. As the 20th century progressed, further innovations—including a benefit program for people with dependent children that set the lead for Australia—were established. So too was a system for settling industrial disputes by arbitration and conciliation, a workers’ compensation scheme, and the 44-hour workweek.

In addition to the attention paid to these areas of government intervention, there was also growing public and professional interest in addressing questions of morality (especially juvenile delinquency, or “larrikinism”), marriage (e.g., concern at a declining birth rate), housing (particularly with regard to the congested and polluted slum areas of Sydney), town planning, and development beyond the cities. Extensive irrigation works commenced on the Murrumbidgee River before World War I (1914–18) with the goal of encouraging settlement in new areas. Further to this end, after each of the two World Wars, returning soldiers were given grants of farming and grazing land. The success of these ventures was often mixed, since the new settlers were often inexperienced and the land tended to be of poor quality or in parcels too small to be viable. As the Great Depression of the 1930s confirmed, many members of the community were unprotected or poorly safeguarded against threats to their well-being. Even in earlier periods of supposed plenty, poverty existed in what was thought to be a land of opportunity. In the interwar years, however, there was a marked polarity between the modernity of Sydney’s middle-class suburbs, with icons such as the Harbour Bridge in the backdrop, and entrenched hardship in other areas of the city and beyond, the subject of much reportage, commentary, and art.

These contrasts were particularly strong for the state’s Indigenous population, which in 1933 numbered 1,229 “full-blood” Aboriginal persons and 8,485 “half-caste.” An Aborigines Protection (later Welfare) Board had been established in 1883, and under new legislation of 1909 and 1915 it acquired the power to legitimize the practices already followed in removing “mixed race” children from the parents, without consent, in the cause of assimilation. These children were placed in hostels where they were prepared for domestic service (in the case of girls) and farm labour (for boys). It is estimated that a minimum of approximately 6,200 children—the “stolen generations”—were removed from their families until the board was abolished in 1969. The January 26, 1938, sesquicentennial celebration of European settlement was characterized as a “Day of Mourning” by well-organized Aboriginal activists such as William Cooper, William Ferguson, and Jack Patten. Day of Mourning protests have been held annually ever since.