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It is hardly surprising then that the new nation did not prosper as it should under Phillip. Due to bureaucratic bungling in the purchase of supplies for the First Fleet, the agricultural tools provided for the first settlers were totally unsuited to the environment. Government farms were set up to provide food for the first citizens of Australia but there were, unsurprisingly, numerous crop failures and petty malfeasances which impeded efficient food production. Relations with the natives were strained and not improved by Phillip's attempts to demonstrate the clear superiority of European culture and British justice: despite being invited to two public floggings, the native pre-Australians remained unimpressed. However as many of the natives were carried off by a smallpox epidemic in 1789, the issue of race relations was a relatively minor problem.

Faced with numerous difficulties, Phillip realised early that the nation building enterprise was doomed from the outset, unless an aspirational class could be encouraged to develop. He therefore wrote to Lord Sydney in 1788, proposing that free settlers be allowed to emigrate to the new settlement. This suggestion was, quite wisely, adopted, however the parlous situation was not relieved until Phillip returned to England in December 1792 and Major Francis Grose took over as Acting Governor. On his departure, Phillip took with him two natives Bennilong and Yem-mer-ra-wan-nie and two unnamed convicts who, according to Clark had "conducted themselves to his satisfaction", although it would be unwise to read too much into this statement.

Grose realised that the growing economic demands of the new nation could not be met by a Soviet style command economy based on the government farms and moved to outsource food production. Since land was plentiful, Grose made land grants to the officers of the garrison and the more respectable free settlers. He also encouraged the development of a free market economy by allowing the officers to engage in trade, buying up the cargoes of incoming vessels for resale to settlers and convicts.

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