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Abstract

Financial crises occurred in many countries in the early 1890s, most of which were

connected to international capital flows. Australia, a major importer of capital, had difficulty

borrowing after the Baring crisis. This paper argues that the consequences of the banking

crash in early 1893 were shaped by local factors. A fortuitous legislative change averted a

calamity by allowing for reconstruction rather than liquidation of banks; economic activity

was depressed as banks became more conservative lenders; and the reconstructions

reduced the wealth of domestic bank creditors and shareholders. We conclude by noting that

there was no targeted policy response in the short or medium term to prevent a recurrence of such an event.

The author would like to thank the referees for this journal, together with Bernard Attard,

André Sammartino, John Waugh and the participants at the Financial Crises and Workouts:

Historical Perspectives Workshop at the Australian National University on 5 September 2012

for their suggestions and advice.

2

Introduction

Previous studies of the Australian bank crash of the 1890s have taken a local view of the

episode within the context of a surge in and then cessation of British capital inflow.

Contemporary writers drew a link between the inflow of British capital and a speculative

bubble in real estate, mining shares and farm property. They identified the tightening of

British credit and end of the land boom as the tipping point for the stability of the banking

chronology of the failure and liquidation of fringe banks, then contagion leading to the

suspension and reconstruction of most banks. Later writers followed a number of lines of

enquiry. Some have highlighted corruption amongst the colony of Victoria’s political and

mercantile elite and weaknesses of corporate governance within businesses at the height of

the boom in “Marvellous Melbourne”. Others have delved into decision-making within banks

particularly with respect to liquidity and capital ratios, the quality of lending decisions and

prudential controls. The efficacy of the decisions taken by the Victorian Banking Association

and by governments in Victoria, New South Wales and Queensland in preventing the crisis

provided another strand to the literature. Interpretation of the reasons for failure remains a

The recent global financial crises have generated a renewed interest in the systemic

instability of financial systems across time, space and regulatory regimes. There is a search

evolution of banking suggests a high degree of commonality across countries with respect to

Bank Failure: Could the Commercial Bank of Australia have been saved by its Peers?”

Victorian Historical Journal 64 (October 1993),122-25 ; and Charles R. Hickson and John D.

History Review (October 2002): 33.

Financial Follies (Princeton and Oxford, 2009).

Perfect Storm, (New Jersey, 2007); William A. Allen and Richhild Moessner, “The

International Propagation of the Financial Crisis of 2008 and a Comparison with 1931”,

Financial History Review, 19 (August 2012): 123-47.

World Since 1800 (Princeton and Oxford, 2010).

3

The Australia banking crisis of 1893 occurred around the same time as a series of banking,

that these crises were connected and there was “a significant risk of a global financial

crises. The 1890s was a spectacular exception. A comparative perspective shows that this

was a focused affair: a banking crisis. There was no associated crisis in sovereign debt

comparison, the value of Argentina’s public debt fell by more than 60 per cent during the

This paper will focus on the local character of the crisis. Three issues will be discussed. The

first concerns the path to the closure of most Australian banks within a six week period

between Easter in April and mid-May of 1893. The question is not why did a wide spread

banking collapse occur but why did the episode unfold as it did and when it did. We shall

argue that the course of the crisis, particularly the emergence of contagion and an

acceptance of reconstruction as a mode of work out, was influenced by the amendments

Without this change in the law dealing with the winding up of companies only several months

prior to the bank crashes an alternative outcome was possible that would have had far more

calamitous impacts. The second question is the link between the bank crashes and the

depression experienced in the real economy. Recent research suggests that by some

measures the 1890s depression was deeper and longer lasting than that of the 1930s. The

1890s depression differed from the 1930s in that it was preceded by a much larger increase

Unprecedented?”, EWC/KDI Conference, Honolulu, Hawaii, 19-20 (August 2010)

Appendix.11

In the 1890s nearly all of the

banks which suspended re-opened after “reconstruction”’. We will argue that the impact of

This Time It Is Different, Appendix A.3, 344-45.

Century (Oxford,1960): 461.

Statistics, (Sydney,1987): 254-87.

Discussion Paper 1999-06, Reserve Bank of Australia (Sydney, 1999).

4

the banking crash on the real economy worked through a combination of expenditure and

wealth effects. The latter, which fell heavily on depositors and shareholders, were mitigated

by being borne by non-residents. The third question is what was the short and medium term

response to this crisis? The short and puzzling answer is surprisingly little. We offer some

speculative answers for the failure to address the specific issue of prudential standards and

regulatory oversight.

What happened to failed banks?

The back story is of a sustained capital influx through public and private channels which

flowed into capital formation and created an asset bubble. By the 1880s speculation was rife

in urban real estate, particularly in Melbourne the capital of Victoria, and there was evidence

of over investment in the pastoral industry and in public utilities. Australian financial

intermediaries, the most important of which were note issuing banks known colloquially as

trading banks, raised funds domestically and in Britain which they lent with abandon.

Specialist intermediaries such as land banks, building societies and pastoral finance

companies, who borrowed from the trading banks as well as collecting deposits and issuing

debentures, funneled credit into building and the pastoral industry. The ratio of credit to GDP

rose strongly as the balance sheets of both the intermediaries and their customers became

highly leveraged.

The boom had run its course by the late 1880s. Falling asset prices, compounded by

shrinking commodity prices, increased pressure on borrowers, whose defaults undermined

the stability of lending institutions. Widespread failures were evident amongst the land banks

and building societies through 1891 and 1892 intensified the fears of trading bank

Australian Economic Development 1861-1900 (Cambridge, 1964): 428-30.

The suspension and liquidation of the Mercantile Bank of Australia and Federal

other 22 banks. Many bank shares carried additional liability, some of which would be

triggered by suspension. Bank shareholders began dumping stock long before depositors

began to look for safer waters. A number of the trading banks were heavily exposed to the

building societies. Those banks felt increasing strain in late 1892 and early 1893 losing

deposits and gold coin, a dangerous position as their notes were fully convertible. The

Commercial Bank of Australia, the largest bank in the colony of Victoria, whose capital

5

Within six weeks, 13 of Australia’s 22 trading banks had suspended.

Almost immediately they were accepting new business as trustees anticipating the formal

reconstruction whereby the “old” bank became a “new” bank. The bargain with creditors was

that instead of liquidation they accepted a conversion of their deposits into longer-dated

securities and, in some cases, preference shares. The shareholders had to meet fresh calls

for capital and their dividends ranked below payment of interest on deposit claims and

off at the time of suspension. However, there was no credit crunch. There was no spike in

This favourable outcome was not inevitable. Some banks were insolvent in early 1893 but

those which were not possessed little defense against withdrawals by depositors wanting the

security of gold. Panic withdrawals of deposits and gold after the closure of the Commercial

triggered the suspension of other banks. Bankers also suspended in anticipation of the

withdrawal of British deposits, some 40 per cent of the total, much of which matured at the

end of the Scottish Whitsun term in mid-May.

and banks honoured one another’s checks and bank notes through clearing

exchanges. By mid-1893 banking went on as usual.

15

The likelihood of suspension by banks under pressure was increased as no colonial

governments had the financial capacity to mount a “bailout” in the modern sense. The

Associated Banks of Victoria did offer support at the margin for banks by liquidating good

quality assets but could not offer a general lender of last resort mechanism.

The suspension of the Commercial and the

likelihood of wholesale withdrawal of British deposits bookended the period in which banks

were most like to suspend.

in each of the three colonies where bank failures occurred undertook a variety of measures

, or particularly

(July, 1893): 661-63 & 688-91.

1945 (Sydney, 1971): Table 51, 494.

(December,1959): 268-79.

1968): 105-6.

6

the Treasurer, G. D. Carter, was anxious to protect the Commercial Bank from going into

liquidation. Senior figures in the government may well have known that the Commercial’s

would have been involved in any such discussions as he acted as Administrator in the

absence of the Governor, the Earl of Hopetoun, and was a member of the Executive Council

only increased suspicion about the safety of individual banks. Later he arranged an

agreement between the government and the banks to make £1.9m available to the

Purchase Act making the short selling of bank shares a misdemeanor may have delayed the

Both New South Wales and Queensland governments undertook action to alleviate the crisis

in their colonies. In an attempt to retain confidence in bank notes, which were not first charge

on bank assets in New South Wales, the government legislated to make bank notes legal

but one of the banks did not wish to be party to the action. Consequently, the Act was not

proclaimed until after the suspension of the Commercial Banking Company of Sydney on the

not have had much benefit as the Commercial Banking Company of Sydney had released its

which was ignored by the strong banks.

(North Melbourne, Vic., 1990): 182.

Bank of Victoria which suspended on 10 May, and also a depositor in the Commercial Bank.

7

with the government. In 1896 after the death of Drury, the Bank’s general manger, it was

discovered that the company was hopelessly insolvent. The government rushed through the

National Bank of Queensland Guarantee Act to safeguard depositors until a revised

What remedies were available to creditors in banks that might be driven to failure by an

inability to pay out in notes or gold coin or which were insolvent? Their rights were

companies acts: the stark choice was liquidation, through the alternatives of voluntary or

compulsory winding up and voluntary winding up under the court’s supervision, or trading on

in the hope of recouping the losses. The collapse of the land boom in 1891 brought about a

rise in personal bankruptcies and company failures of those speculating in property and

shares. Politicians caught up in the failures rushed through new legislation, the notorious

Voluntary Liquidation Act 1891, which “by protecting companies from being forced into

winding-up under court control and allowing voluntary liquidation to proceed unrestricted, …

Help came from an unexpected quarter. Agar Wynne, a member of the Legislative Council,

Companies Act in May of 1892.

The new legislation

increased the likelihood of liquidation of any bank which was to suffer a loss of its depositor’s

confidence.

it too easy for firms to be liquidated in a manner which did not respect the rights of all

Liquidation Act, and [the other] embodying clauses with reference to compromise similar to

(July,1893): 662.

(Melbourne, 1958): 212-15.

Law Review, 18 (June, 1991-92): 174. For descriptions of commercial practices of the time

South Wales Law Journal 15 (1992), 381.

8

presciently suggested that the Bill “should deal with companies which were not yet defunct

The Court noted that

The rules

Stock Companies Act 1870. The pendulum had swung towards a court sanctioned process

which was based on an easy test for compromise or reconstruction only months before the

banking collapse.

before sanctioning a scheme for compromise or arrangement made between a

company and its creditors under the Companies Act Amendment Act 1892 (No.

1269). secs. 3 or 4, the Court will consider whether or not the scheme proposed is

such that men of business might reasonably come to the conclusion that it was a fair

scheme and likely to be beneficial to all classes of creditors concerned. Subject to

this, it is the intention of the Act that the majority of the creditors should be allowed to

The reception by the Court of the scheme of arrangement put before it by the Commercial

Bank of Australia was of critical importance. If the proposal was rejected, delayed or

seriously modified one can conjecture that the creditors of others banks would have

increased pressure on their own institutions. If banks started selling assets on a falling

market to raise cash, then the moment would have arrived when insolvency rather than

illiquidity was the issue for most banks. In these circumstances it is likely that the crisis

would have been far more severe and the banking system deeply compromised. No attempt

has been made to undertake a formal analysis of this counterfactual. Rather, I identify a

number of plausible assumptions about what might have happened. For instance, only a

handful of banks may have survived, the contenders being the Bank of New South Wales,

the Union Bank of Australia and the Bank of Australasia. However, they lacked the capital

and human resources to meet the banking needs of the whole country in terms of providing

bank notes, the domestic and international payments systems, accepting deposits and

making loans. The government owned savings banks in each of the colonies did not possess

the capabilities or the branch networks to offer the range of services provided by the defunct

9

trading banks. Some form of public sector bailout may have been necessary, possibly

nationalization of the private banks via government capital injection. The fresh capital to be

provided by shareholders in the reconstructed banks operating in Victoria, including two

British banks, the English, Scottish & Australian Chartered Bank and the London Chartered

burdens on the government resources of that colony which in 1893 collected only £2.5m in

The petition for compulsory winding up was presented to and accepted by Holroyd, J, of the

Victorian Supreme Court.

The chaos prior to any such bailout and

the terms of the bailout itself may have led to a budget blow out which in turn might have

triggered a crisis in sovereign debt and currency markets.

winding up at the present time would be disastrous to all concerned”, permitted the

reconstruction scheme to go ahead without a searching examination of the issues involved

or mandating statutory meetings with creditors in both Australia and Britain. An appeal to the

Full Court on behalf of British depositors against a number of elements of the scheme was

heard mid-May. The three judges on the bench, including the highly experienced Holroyd,

wrestled to interpret the extent of their authority under the new legislation and its British

precedents. While nearly all of the matters of the appeal were rejected, it was clear that the

judges had a number of concerns about procedural issues. However, the Court’s decision to

reject the appeal was influenced at the margin by the transfer of the assets of the old bank to

the new bank before the appeal, and as many new customers had made deposits with the

Fortuitously given what was about to unfold, the test proposed in the Act significantly

increased the likelihood of reconstruction rather than liquidation. If more than three-quarters

of the creditors at the meeting agreed to follow this course of action the Court had little ability

to overturn that it decision unless the bench found it to be glaringly unfair or unreasonable.

Statistics (Sydney, 1987): G51-75.

these matters. He bears no responsibility for my interpretation. Personal communication with

the author on 8 August and 11 August, 2012.

10

The Court felt constrained to reject the scheme on the basis of any doubts it might have

about the financial position of the Bank. The Court needed to be satisfied that a full

disclosure of the financial position was to be presented to the creditors at the meeting. In the

judgement of the Full Court, Holroyd stated that “if an institution is unsound, it is better that it

go into liquidation at once than its subsequent downfall should inflict a more widespread

insolvent. Holroyd argued that “even if the Court had before it all the materials relating to the

bank’s position, the Court would find it difficult to pronounce an opinion as to what might be

day given the Commercial’s revealed losses rose from £0.8m at the time of its suspension to

£3.0m, with another £1.5m of non-performing assets held in an off balance sheet Special

event that “when this bank failed in 1893 it should have stayed shut. It was in the most

awfully putrid state, for out of its £13,000,000 of assets only about £2,000,000 were

The wording of the Act tied the hands of the judges. Reconstructions were readily obtained.

The decision in the Commercial case served as the template for the others which followed,

suspending and re-opening even before the Commercial’s appeal had been completed. New

Arrangements Act, which was assented to in January 1892, was identical to Victoria’s

Reconstructed Companies Acts, were passed in Victoria in 1893 and in New South Wales in

1894, respectively. These Acts facilitated the transfer of business being done within Britain

books from the old banks to the new, saving the new banks from an administrative

32.

(Sydney, 1926): 58.

11

The bank crashes and the depression

The existing literature has surprisingly little to say about the role of the bank crash in

explaining the timing, depth or duration of a depression which in many respects was more

bank crash a central role in causing the depression. He argues that the depression resulted

from an intersection of the creation of structural imbalances, excess physical capital stock,

arising from over investment and from a tightening of credit in London. Exuberant lending by

banks and other financial intermediaries had facilitated the emergence of asset bubbles. As

economic activity slowed, asset values tumbled and bankers were left with impaired loan

books. A tipping point was reached in early 1893 where many of them faced critical liquidity

and solvency issues resulting in reconstructions and liquidations. Having purged the

excesses of the speculative boom by writing off assets, the banks struggled to rebuild their

balance sheets in a depressed economy. However, Boehm argues that the causation flowed

both ways as the “rehabilitation” of the banks resulted in “‘a severely contractionary credit

policy throughout the remainder of the nineties [which] contributed greatly towards the

Tables 1, 2, & 3 around here

In Table 1 we see that the level of GDP had peaked in all six colonies years before the bank

crash. Moreover, the trough of the depression occurred either before or at the same time as

the crash in three of the colonies. A recent study of multi-country crises suggests that

The Australian experience fits with the first claim, but not the second. Recovery, measured in

terms of national GDP exceeding the earlier peak, was protracted taking nine years. The

impact of the depression differed markedly across the country. For instance, Victoria

suffered a contraction of a third in its GDP between 1890 and 1894 and took until 1907/08 to

overtake its earlier peak. Do regional differences in the credit boom of the 1880s explain the

variation in GDP movements? Table 2 shows that bank advances as a proportion of GDP

grew fastest in Victoria and Queensland between 1880 and 1892. Victoria was home to

Working Paper 18194 (June 2012): 1-2 and 11.

12

banks which accounted for more than a half of the national total of loans and had the largest

lasting depression. However, Queensland, which experienced a comparable credit binge, did

not. Other colonies, most importantly New South Wales which escaped a Victorian style

banking boom and crash, suffered deep and long lasting depressions. Clearly, multiple

factors are at work here, including droughts, swings in commodity prices, gold discoveries in

Western Australia, flexibility in labour market adjustment, deflation and so on which make

disentangling the impact of the bank crashes on the depression and the process of recovery

While economic activity peaked in all colonies years before the bank crash we will identify

two channels through which the crash did directly contribute to the severity and duration of

the depression. We are not in a position to say which played the most important role in

transmission. The first, discussed below, is the slower credit growth after the crisis. The

crash precipitated a long and deep decline and slow recovery in bank lending as shown in

Table 3. However, it is difficult to determine whether this was a cause or consequence of

the depression. Banks did accommodate themselves to falling demands for credit from their

customers whose incomes were shrinking. Businesses and households were deleveraging

their balance sheets as the asset bubble unwound. The excess of physical assets in the

housing and pastoral sector dampened demand for new investment. The behavior of interest

rates suggests that demand for bank loans fell. Nominal interest rates charged for bank

loans declined from nine per cent in March 1891 to a trough of six per cent in 1897, and the

slow the growth of credit by changing the way they managed their balance sheets. The total

assets of the private banks fell by 25 per cent from 1892 to a trough in 1899. Both the

amount of bank advances and the money supply, M2, fell more sharply, by 35 and 47 per

Tables, 13-18; 166-276. Capital write offs from Merrett, “Preventing Bank Failure”, Table

5,137.

Holdings of cash grew relative to deposits, and earnings and fresh

investment made by shareholders as a result of the reconstruction schemes were siphoned

off to rebuild reserves. The amount of lending relative to the deposit base fell.

Victoria 1894-1899, (Canberra, 1956). For a recent account of the complexity of this episode

(Princeton and Oxford: 2012), 113-32.

13

Table 4 around here

The second channel between the bank crash and the depression resulted from the

reconstruction arrangements made between financial institutions, their creditors and

shareholders. The reconstruction schemes greatly reduced the wealth of bank creditors, who

agreed to hold illiquid long-dated securities or preference shares, and of shareholders who

were forced to pay calls for fresh capital and ranked behind depositors and preference share

holders’ interest before receiving dividends. Table 4 presents estimates of movements in the

money stock because of the impact of the reconstruction schemes as indicators of the

These are national figures. We suggest that the fall in the money supply in Victoria would

have been higher than elsewhere. The key results are that M2 and M3 fell by over 40 per

cent from peak to trough, and recovered slowly. Even after adding back a discounted market

value of locked up claims once a secondary market is established, on the unrealistic

assumption that all long-dated deposit claims were immediately sold into that market, M2*

and M3* still contract by around 20 per cent. These falls represent a range of 33 to 14 per

cent of Australia’s GDP in 1893. The comparable decline would have been far higher in

Victoria. These falls dwarf those occurring in the 1930s. In that depression, M3 contracted by

11 per cent on an annual basis and 14 per cent on a quarterly basis between March 1928

banks, “London funds”, as part of their cash holding or high powered money, in his analysis

of the relationship between changes in the stock of money and the real economy. The

willingness of the banks to let their reserve ratios fluctuate in a counter cyclical way leads

him to conclude there was not “any significant relationship between contraction of the money

What happens to the wealth of bank shareholder’s caught up in the reconstruction schemes?

The data set is far thinner than for depositors but the story seems worse. Merrett argues that

the market value of most Victorian banks was already below book value prior to the onset of

Paper 9303, Reserve Bank of Australia (Sydney,1993): Table 4 and 6, 12 and 15.

While Hall calculates that the value of shares in “Melbourne banks” contracted

by more than 80 per cent between 1889 and 1900. Moreover, the value of all bank shares,

and Policy in the 1920s and 1930s (Sydney, 1970): 207 and Table C-1, 384-7; C. B.

14

presumably including the Sydney and British banks, listed on the Stock Exchange of

Table 5 around here

The unwinding of the asset bubble had considerable wealth effects. Table 5 shows the

significant fall in residential property values, around 40 per cent, in Sydney and Melbourne,

and a long period to recovery. Moreover, values for various classes of securities on the

Sydney Stock Exchange also exhibited heavy falls and slow recovery, especially for financial

shares. Balance sheets of households and business were shrunk further by the reduced

value of their claims against banks. A crude measure of this impact is to compare the fall in

the value of M2 and M3 to GDP in 1893, roughly a third. We can assume that reduced

income from the ownership of financial assets and associated dis-saving would have

depressed expenditure below what it otherwise would have been, contributing to lower

production and rising unemployment. However, for those with cash and a sharp eye for

A contraction in the value of assets on this scale begs the question of why the depression

was not more severe and last even longer than it did. Fortunately, the full effect of liquidation

and reconstruction schemes was diluted by foreign ownership. Roughly 40 per cent of bank

deposits were owned by British residents, and three-quarters of these were with banks that

escaped the full force of low commodity prices and the drought through the greater exposure

Australasian and Insurance and Banking Record estimated that British investors had

committed £18m in shares and £28m in debentures in pastoral companies, and British

(Canberra, 1968): Table 12, 230.

Some of this capital was swept away as some of the leading pastoral companies followed

(Melbourne, 2012): Part 2.

1964): 159.

15

Table 6 about here

Yields on investments fell heavily as

reconstruction schemes, falling profits and interest rates cut share values and dividends.

For two decades up the World War I, British investors liquidated large amounts of their

portfolio positions in Australian activities. The British quit their deferred deposits upon

maturity, leading to a radical and swift shift in the composition of the balances held by banks

calculations shown in Table 6 highlight the growing importance of Australian and New

Zealand ownership of claims against corporations and governments relative to the British

investors, and the absolute fall in the value of claims against private sector entities by the

British. This is more than a reduction in capital raising by non-mining Australian firms in

The losses suffered by British investors in the 1890s signaled a change in the relationship

between the two countries in terms of capital exports. Australian governments returned to

the British capital market on a large scale before WWI and in the 1920s. However, we

suggest that passive portfolio investment by Scottish widows was replaced by foreign direct

investment by British companies in a new range of industries. It is difficult to know when the

balance shifted decisively in favour of FDI by British multinationals.

Existing claims were being liquidated or sold to Australian resident holders.

the nineteenth century much of direct private capital inflow from Britain had taken place

through the agency of “free-standing” British registered firms, principally merchant houses

financiers see David Merrett, Stephen Morgan and Simon Ville, “Industry Associations as

Facilitators of Social Capital: The Establishment and Early Operations of the Melbourne

There

was a shift towards direct investment in Australia by the more conventional twentieth century

multinational whose overseas subsidiaries were minor adjuncts to home market activities. By

1945 (Sydney,1971): Table 4 (ii), 126.

11, 206.

Banking 1870-1914, (Oxford, 1991): 28-9.

16

the 1930s, more than 80 leading British and American manufacturing companies had set up

Responses to the bank crashes

What happened next? Peter Love wrote that “the depression of the 1890s left a profound

impression on the minds of a whole generation of Australians and accentuated a number of

The bank’s customers returned. For those who only wanted a savings instrument there were

alternative and seemingly safer places to earn interest on savings, and the trading banks lost

deposit market share to the savings banks and life office’s industrial policies up to WWI.

Deposits in trading banks had barely recovered their 1893 level by 1903 but grew by 61 per

cent to 1913 to be still nearly double those in the savings banks.

How did Australia respond

to the banking crisis? Why was no action taken to ensure that a repeat of this type of

banking failure was less likely such as formal collective agreements about prudential

standards enforced through clearing house associations as in the United States of America

or the establishment of a central bank with prudential oversight? The varied reactions of the

key actors, the customers, the banks, and the state, provide some clues.

credit or making payments had fewer alternatives. Banks were still the dominant providers of

credit to high net worth individuals and businesses. Moreover, the banks continued to enjoy

their monopoly in the provision of domestic and international payments system. They alone

provided checking accounts, and organized inter-bank clearing through local clearing

houses. Extensive networks of correspondence arrangements with foreign banks allowed

them to make and receive payments for importers and exporters, and capital transfers

inward and outward. The bank’s revenue base was further protected by transaction fees on

The banks battened down their hatches and hung on during the 1890s. Survival was the

immediate focus and salvation came with the breaking of the drought, rising commodity

prices, renewed immigration and rising government spending in the new century. Once the

obligations incurred as part of the reconstruction schemes had been paid off around 1900

III, 230-32.

Multinationals (London, 1990):62-84; David Merrett, “Global Reach by Australian Banks:

Correspondent Banking Networks 1830-1960” 37 (July, 1995): 70-88.

17

banks began rebuilding their holdings of cash overseas and locally, and adopting a

any further calamity. However, this was the result of commercial decisions made within each

bank in accordance with the canons of sound banking. Boards of directors, some of whom

had special places for those representing the preference share holders, played a far more

active role in the affairs of their banks. Executive authority was diminished in both the weak

and the strong as the directors of both the Commercial Bank of Australia and the mighty

Why was there such a lack of imagination, intellectual curiosity and urgency in the response

of the banking community? Part of the explanation may lie in the human resource practices

of these institutions. The emergence of internal labour markets towards the end of the

nineteenth century trained workers in bank-specific functional skills. These closed labour

markets were not conducive to the emergence of new ideas or of encouraging to mavericks

reaching the top. Even those British banks operating in Australia had no transfer of staff

between the two countries, and firsthand experience of the Bank of England’s role as a

central bank in the City was limited to the small number of British staff in the London offices.

Moreover, the closure of the Australian market to foreign banks closed another avenue of

new ideas and different experiences which might have widened the horizons of local

bankers.

What of the state? While Australia did have a “free banking” regime through the nineteenth

century, there were minimal restrictions on entry, no controls on interest rates or balance

some form of central banking in the 1890s. One reason for the absence of a government

bank prior to this point was that two functions often carried by central banks at the time,

issuing and managing government debt and issuing bank notes, were dealt with by other

means. The borrowings of the independent colonies were handled by a combination

individual and consortium of “domestic” banks, particularly the Associated Banks of

or external institutions such as the London & Westminster Bank and the Bank of

Bank: A History of the Australia and New Zealand Bank and Its Constituents (Sydney, 1980):

47-48.

Australian Economic History Review,42 (2002), 270.

18

Robin Gollan wrote “one of the responses to [the crash] was a demand for a national bank

and currency, more emphatic, more extensive, and somewhat more precise than ever

to make laws with respect to banking. Political parties from the right and the left in the

federal parliament were thinking long and hard about creating a national bank. Sir John

Forrest, Treasurer in Alfred Deakin’s Ministry of 1905-07, was corresponding with the Bank

electoral cycle provided the Labor Government of Andrew Fisher, with majorities in both

Houses, to introduce legislation with respect to both the note issue and to establish the

The Commonwealth Bank of Australia grew in stature and influence, with its powers

significantly enhanced by amending legislation in 1924, before becoming a full blown central

bank in the early years of WWII. In hindsight, there was no grand plan. Geoffrey Sawer

reflected that “… in the period of its foundation, when particularly feared for its socialist

implications, the Bank was least equipped to carry out its ambitious plans for economic

control, and the Fisher government (to the disgust of the Bank’s ideological father, King

responded to the most pressing matters of the day whether these were financing rural

producers or raising war loans during WWI, or coping with the emerging problems facing the

least from the Bank of England, for the creation of a central bank in Australia. It did evolve

into a policy maker, with considerable independence from the governments of the day, on a

range of monetary matters, refusing to fund government debt and devaluing the Australian

Conference of the Historical Mission of the Bank of France, Paris, 15 and 16 March 2012.

The power it exercised came from amendments to its governing

http://www.banque-france.fr/la-banque-de-france/histoire/mission-historique/colloques-etpublications/

The Commonwealth Bank of Australia 1924-1945 (Melbourne, 1951).

Australia (Sydney, 1993): Documents 4-9, 5-15.

Development and Service to the People of Australia and the British Empire (Sydney, 1923).

19

legislation in 1924 and from the accumulation of skill and experience of its board and

executive staff, most of whom were drawn from the second-tier of management of the

private banks. Private bankers fought as best they could against the growing diminution of

The inability to respond directly to the issues of financial instability for decades afterwards is

a puzzle. This inaction contrasts with the political will to federate and to create a host of new

institutions to deal with particular problems such as regulating the labor market and setting

minimum wages, forming the Loan Council to coordinate international borrowing by the

States and the CSIR to promote research. Could it have been that gaining an understanding

of what needed to be done about instability in the Australian financial system in the 1890s

and 1900s was just too difficult? There were no easily identifiable models to adopt. The

evolution of central banking in the northern hemisphere in the late nineteenth century was an

intuitive and organic process shifting shape between countries and embedded within

country-specific institutional frameworks.

However, on the eve of the Japanese attack on Pearl Harbour,

the private banks still enjoyed complete freedom from central bank control over the

composition of their balance sheets, the ability to lend to whomever they pleased and to set

interest rates. Prudential regulation was not yet part of the remit of the Commonwealth Bank

of Australia.

economists, employed by universities and having strong intellectual links to Britain, rose to

Could it be that customers, bankers and governments, both politicians and bureaucrats,

came to believe that because there was no repeat of the episode then all was well? The

great shocks of the new century, two wars and a depression, did not result in a banking

crisis. Post-WWII monetary policy imposed tight liquidity ratios as a by-product of its

management of bank credit. When financial deregulation in the 1980s permitted banks to

once again lend with abandon and doubts arose concerning the solvency of some, the

Reserve Bank of Australia found its cupboard of prudential controls embarrassingly bare.

Conclusion

(London,1985).

Triumphs of the Economist in Australian Public Life (Canberra, 2006).

20

Many commentators have expressed incredulity at the enthusiastic reception given by the

Commercial Bank’s shareholders at the Melbourne meeting to endorse the proposal to

reconstruct. We argue that the critical decisions which determined the outcome of the

Amendment Acts, first in New South Wales, prior to the suspension of a major bank

determined the outcome of the crisis. Judges had little discretion to reject or amend the

proposal before them to reconstruction once three-quarters of the creditors at the meeting

voted in favour. Consequently, Australia had a far softer landing than it would have

experienced if there had been wholesale liquidation of its banks in 1893.

The reconstruction schemes set the terms for the workout of failed banks. The bargain was

that both creditors and owners shared the pain by deferring claims and ownership rights for

lengthy periods. There were externalities associated with these contracts, the banking

system continued to function and the private costs to the parties spilled over into the real

economy. The reduced wealth of depositors and shareholders depressed spending. We can

estimate the loss of wealth suffered by depositors. The upsurge in British deposits held by

Australian banks has been seen as a contributing factor to the excessive growth of credit

The lack of a targeted response at the time to prevent a reoccurrence to the crisis remains a

puzzle. On one level, the crisis solved itself through workouts whose parameters were set by

a series of court sanctioned private treaties between the parties involved. The economy

eventually resumed growth. We muddled through. To my knowledge, there was no

articulated view that a private rather than a public intervention was the optimal response. On

the contrary, at this time the character of the Australian polity had a decidedly interventionist

bent. The powers of the state rose as a consequence of Federation in 1901, and political

parties fought to use the authority and resources available to government. However, bank

reform to provide for prudential regulation was lost amongst the plethora of other initiatives

for generations, partly because in the absence of another bubble generating wide spread

instability at the core of the financial system prudential issues were not seen as important.

However, the negative wealth effect on

the Australian economy was reduced by much of it falling on non-residents. British investors

were heavily exposed to other non-bank financial intermediaries who suffered losses. Not

surprisingly there was a large scale withdrawal of British private portfolio investment from

Australia before WWI.

21

Table 1: Nominal GDP peak, trough and years to recovery

Colony/state Year peak Year

trough

Year

recovery

T/P% Years to

trough

Years to

recovery

NSW 1891 1895 1903/4 76 4 10

Victoria 1890 1894 1907/8 66 4 15

Queensland 1888 1891 1894 93 3 4

SA 1890 1895 1905/6 70 5 12

Tasmania 1889 1893 1899 74 4 7

WA 1889 1890 1892 95 1 3

Australia 1889 1895 1903/4 66 6 9

Colonies/States 1861-1976/77 (2009), http://arrow.monash.edu.au/hdl/1959.1/88855; N. G.

(Cambridge, 1962): Table 1, 6.

Year of recovery is when GDP exceeds that of previous peak.

Table 2: Bank advances as proportion of nominal GDP in 1880 and 1892, by colony and

Australia

NSW VIC QLD SA WA TAS Australia

1880 34.2 39.4 35.6 29.2 28.6 26.3 34.0

1892 59.5 89.8 91.6 52.1 64.7 40.8 73.7

Product, Table 1, 6.

22

Table 3: Trading bank advances by colony, peak, trough and recovery

Peak Trough Years P-T T/P% Recovery Years T-R

NSW 1892 1900 8 73 1912 12

Vic 1892 1905 13 54 1921 16

Qld 1889 1900 11 70 1916 17

SA 1890 1900 11 45 1916 17

Tas 1891 1897 7 55 1921 24

Year of recovery is when bank advances exceeds that of previous peak.

Table 4: Money supply adjusted for deferred deposits within Australia

Peak Trough Years P-T T/P% Recovery Years T-R

M1 1890 1893 3 82 1895 2

M2 1890 1893 3 53 1907 14

M3 1892 1893 1 59 1902 9

M2* 1890 1894 4 78 1906 8

M3* 1892 1893 1 83 1900 7

Merrett, “The 1893 Bank Crashes and Monetary Aggregates”,Table 4, 12 and Table 6, 15.

M1 Currency plus trading bank demand deposits; M2 Currency plus trading bank demand

and time deposits; M3 Currency plus all trading bank and net savings bank deposits; M2*

with “market value” of deferred deposit receipts added back; M3* with “market value” of

deferred deposit receipts added back.

23

Table 5: Decline in value of house and security prices in Melbourne and Sydney

Peak Trough T/P% Recovery

Melbourne house 1891 1903 63 1917

Sydney house 1890 1898 59 1913

Sydney financial shares 1890 1894 41 1922

Sydney industrial &

commercial shares

1889 1894 69 1903

Sydney mining shares 1890 1895 20 After 1910

Source: House prices form Nigel D. Stapleton, “Long Term Housing Prices and Some

Economic Perspectives”, unpublished PhD, Australian School of Business, School of

Economics, University of New South Wales (2007): Tables 2.1 & 2.2, 58-61. Security prices

from D. McL. Lamberton, “Some Statistics of Security Prices and Yields in the Sydney

Table 6: Change in Australasian and British ownership of Australasian securities, 1899 and

1912/13, £m

Australasia

1899

Change 1899-

1912/3

Britain 1899 Change

1899-1912/3

Government debt 25 93 209 65

Local government 8 17 14 0

Bank securities 25 -5 19 -5

Non-mining 42 59 72 -20

Mining 28 -1 80 -51

Total 128 165 395 -11

1899), xxvii and (Sydney, 1913/14), xxviii-xxix.

Note: Includes New Zealand public debt, bank deposits and corporate securities.