Chay Fisher and Christopher Kent
Research Discussion Paper 1999-06
June 1999 System Stability Department Reserve Bank of Australia
We would like to thank Philip Lowe, Marianne Gizycki, David Merrett, Bryan Fitz-Gibbon, David Gruen and Peter Stebbing for helpful suggestions. Thanks to David Merrett and David Pope for early advice and encouragement. Thanks also to Adrian McMahon for help in preparing this document. Any remaining errors are our own. The views expressed are those of the authors and should not be attributed to the Reserve Bank of Australia.
The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression. We show that variation in the performance of the financial sector during the two depressions was due to differences in the condition of the financial sector well before each depression. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector.
JEL Classification Numbers: N10, N20 Keywords: Australian economic depressions, financial instability, banking crises
Table of Contents
1. 2. Introduction Two Depressions: Output and Banking 2.1 2.2 Output During the Depressions 1890s Banking Collapse versus 1930s Banking Problems 2.2.1 Trading banks 2.2.2 Savings banks 1 3 3 6 9 14 17 18 22 24 26 28 33 35 35 38 38 39 40 41 44 46 49 50 ii
A Comparison of Indicators of Financial System Stability 3.1 3.2 3.3 3.4 3.5 3.6 Investment – Public and Private Speculation in the Property Market Credit Banks’ Balance Sheets and Foreign Borrowing Risk Management – Prudence and Diversification Competitive Pressures
Real Macroeconomic Features of the Two Depressions 4.1 4.2 Exogenous External Factors Exogenous Internal Factors 4.2.1 Population 4.2.2 Weather conditions 4.2.3 The gold standard 4.2.4 Fiscal and monetary policy
Discussion and Concluding Remarks
Appendix A: Data Sources and Descriptions Appendix B: Additional Data References
TWO DEPRESSIONS, ONE BANKING COLLAPSE
Chay Fisher and Christopher Kent
Over the past 150 years, Australia has experienced two macroeconomic depressions, both of which coincided with worldwide depressions.1 The first of these was in the 1890s and the second in the 1930s. These were also times of financial distress both domestically and in the rest of the world. For Australia there were many similarities across both depressions. Indeed Sinclair (1965, p. 85) suggests: ‘There is such an obvious similarity between the economic depressions which occurred in Australia in the 1890s and the 1930s that it is tempting to suggest that history was repeating itself in the latter case’.2 However, in this paper we highlight one of the major differences between the two depressions. Namely, the 1890s involved the collapse of a significant proportion of the Australian financial system, whereas the disruption to the financial system in the 1930s was comparatively mild. The fact that Australia did not experience a major financial crisis during the 1930s is remarkable in a number of respects. First, the initial fall in real output during the 1930s was just as large as the initial fall during the 1890s – that is, around 10 per cent during the first year of each depression. Second, the world depression was worse, and the Australian terms of trade fell further, during the 1930s than during the 1890s. Third, both the United States and, to a lesser extent, the United Kingdom experienced more severe financial crises during the 1930s than during the 1890s.3
Before these, there was a severe depression in the 1840s. Sinclair actually...