Although Cook's reports of his discovery were encouraging, they might have gone unheeded for some time had Britain not lost the thirteen colonies in North America (1783), where it had long sent convicts to work as indentured servants. The British then turned to Australia as a place to deport criminals. In 1788 a British convict expedition under Captain Arthur Phillip was sent to Botany Bay in New South Wales. The party actually disembarked a short distance away at Sydney Cove, where the penal settlement was established. Phillip became the first governor of the colony and encouraged exploration of the neighborhood.

In 1801–03 the British explorer Matthew-Flinders circumnavigated the continent and charted many of its waters. The Blue Mountains, a barrier to the interior, were crossed in 1813.

In spite of many difficulties, the Sydney Cove colony survived and began to develop. When their terms expired, most of the convicts chose to remain and some obtained land for farming. A native-born generation grew up, and free immigrants began to arrive. Settlements were made at Hobart, Tasmania (1804); on the Brisbane River in Queensland (1824); on the Swan River in Western Australia (1829); at Melbourne in Victoria (1835); and Adelaide in South Australia (1836).

During the middle of the 19th century, the widely separated coastal settlements gradually developed into individual colonies with governors of their own. From 1820 to 1850, population rose from 34,000 to 405,000. Sheep raising for wool export displaced whaling and sealing as the major activity. Sheepmen in search of new pastures crossed the mountains to the interior and "squatted" on (took possession by occupying) the land. Also important to the early growth of the Australian, economy was crop agriculture, particularly wheat farming.

In 1851 gold was discovered by Edward Hargraves near Bathurst, New South Wales. Other finds followed quickly, including the rich deposits of Ballarat in Victoria. Gold brought thousands of people to Australia, and population rose to about 1,146,000 by 1860. In 1892–93, new gold fields were found in Western Australia, at Coolgardie and at Kalgoorlie, which became Australia's most important gold-mining center.