Australian banking crisis of 1893

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The 1893 banking crisis occurred in Australia when several of the commercial banks of the colonies within Australia collapsed.

During the 1880s there was a speculative boom in the Australian property market. Australian banks were operating in a free banking system, in addition to few legal restrictions on the operation of banks, there was no central bank and no government-provided deposit guarantees. The commercial banks lent heavily, but following the asset price collapse of 1888, companies that had borrowed money started to declare bankruptcy. The full banking crisis became apparent when the Federal Bank failed on 30 January 1893. By 17 May, 11 commercial banks had suspended trading.

George Selgin (1992) provides some evidence that the Australian banks did not engage in overexpansion. According to Merrett (1989, p. 75), the aggregate reserve ratio (specie to notes and deposits, including time deposits) fell from 0.3217 in 1872 to 0.2188 in 1877. Merrett's figures for later five-year intervals show no further downward trend. Although the ratio declined to 0.1687 in 1882, it returned to 0.2158 in 1887, falling once more to 0.1656 in 1892.

The figures provided by Pope tell the same story. Relying on Pope's annual data, Selgin tells that the average ratio of the 13 suspended banks actually rose steadily from about 0.15 to about 0.16.

According to Selgin, the boom was financed "not by any increase in the bank money multiplier, but by injections of high-powered money from Australian gold mines and from the British capital market". He then argues that the Australian banks were unprepared to the sudden end of capital inflows from Britain due to the Barings Crisis of 1890.

Hickson and Turner (2002) seem to agree with the body of evidence brought by Selgin : "However, by 1891, the ‘zombie’ land mortgage companies were no longer able to survive as the inflow of British deposits dried up. Correspondingly, the commercial banks were forced to ration credit to land mortgage companies due to the increased cost of raising deposits in Britain. As a result, from 1891 to March 1892, in Melbourne and Sydney alone, deposit-taking building or land finance companies failed" (Hickson & Turner, 2002, p. 148).

References

• Hickson, C. R. and Turner, J. D. 2002. Free banking gone awry: the Australian banking crisis of 1893. Financial History Review 9:147-167.
• Selgin, George. A., 1992. Bank Lending ‘Manias’ in Theory and History. "Journal of Financial Services Research" Volume 6, Number 2 (1992), 169-186.
• Merrett, D.T. (1989) ‘Australian banking practice and the crisis of 1893’, Australian Economic History Review, 29(1): 60–85.
• Pope, D. (1989) ‘Free banking in Australia before World War I’, unpublished manuscript, Australian National University, Canberra.

Links

• The Experience of free banking by Kevin Dowd, 1992