Australian banking crisis of 1893

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

Foundations

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.

Crisis

The full banking crisis became apparent when the Federal Bank failed on 30 January 1893. On 1 May 1893, the Victorian government implemented a five-day bank holiday to address the panic.^[1] By 17 May, 11 commercial banks in Sydney, Melbourne and other locations across the country had suspended trading.

Many institutions temporarily or permanently closed their doors, including:

• August 1891 – Van Diemen's Land Bank^[2]
• September 1891 – Mutual Provident, Land, Investing, and Building Society^[3]
• February 1892 – Toowoomba Deposit Bank^[4]
• July 1892 – Victoria Mutual Building and Investment Society^[5]
• February 1893 – Federal Bank,^[6] and the Queensland Deposit Bank.^[7]
• April/May 1893 – Within seventeen days, three banks collapsed: the Australian Joint Stock Bank, the Commercial Bank of Australia, and the English, Scottish and Australian Chartered Bank^[8][9]
• May 1893 – the Bank of North Queensland,^[10] the Brisbane Permanent Building and Banking Company,^[11] the City of Melbourne Bank,^[12] the Commercial Banking Company of Sydney,^[13][14] Federal Building, Land, and Investment Society, Limited, and Deposit Bank,^[13] the National Bank,^[15] the Queensland National Bank,^[14][14] and the Royal Bank of Queensland.^[16][17]

Critique

Whilst gold and securities were held by certain banks, many Australian institutions did not make representations to their London branches which held those deposits.^[13][18]

By 1894, the worst of the economic crisis was over and the task of rebuilding society started. Criticisms were levelled at board directors:

The first result is that colonial banks have frequently opportunities for making larger profits in comparison with the volume of business than is possible with home banks. The second result arising from this possibility of larger profits is that there is a greater element of risk attaching to the business than attaches to the ordinary business of a British bank, and consequently need for greater caution in investments. It needs but a moment's consideration to reveal the fact that money advanced for the carrying on of our staple industry — the pastoral industry — is exposed to greater risk than money advanced on the comparatively steady staple businesses in Britain. Our staple industry is exposed to the caprices of climate and the invasion of insects, insignificant when considered singly but terribly significant when considered in the muss. Droughts, frequently recurring, blast the hopes of the pastoralist by robbing him of all prospect of return for his labour and anxieties, and that blasting of the squatter's hopes means loss to the institution which has advanced him money.^[18][19][20]

These comments of 1897 were made as the Federation Drought (1896 to 1902) commenced, which resulted in the forthcoming widespread death of livestock and strains of livelihoods. There were some reforms to regulation and law with a view to preventing future abuse.^[21]

See also

• History of Australia (1851–1900)

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