THE 1961 ‘CREDIT SQUEEZE’
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THE 1890-1897 ECONOMIC DEPRESSION
(When the state of Victoria led the world in ‘spec’.)
From “The Boom of 1890 and Now” by E.O.G. Shann, 1927, pp. 20 – 23.
In November came the resounding collapse of Barings, the London Bankers who had ventured most in the Argentine. On December 20, 1890, the Premier Building Association, Melbourne, suspended payment. It had numerous British depositors, and withdrawals from other land and building companies began forthwith.
Australian loans were very coldly received in London during 1891 and on September 12 of the year “The Economist” newspaper was warning British investors against the land banks, “cancerous growths upon the otherwise sound body of Victorian finance.” It had good cause. Twenty-one land and finance companies went down in Melbourne between July 1891 and August 1892, with liabilities of £13,500,000, including 3½ millions of British deposits. The end had come of borrowing money for short terms and spending it on the chance of its being repaid over long periods.
Worse followed. In August 1891 the Bank of Van Diemen’s Land failed. In March 1892 the Mercantile Bank of Victoria followed, and in January 1893 the fall of the Federal Bank made the first breach in a serried array of Associated Banks. That the agony was so long drawn out was due to the active pursuit, to the very end, of fresh British money, not only by the land banks but also by some of the associated banks of issue.
Most adventurous in this were the Commercial Bank of Australia and the Bank of Victoria. Though the Commercial’s Australian deposits were falling after 1890 at the rate of £400,000 a year, its British deposits still rose until they stood at £5,638,000 early in 1893. At best, this British money only postponed the trouble, for in the profound depression which had set in the rates paid for it could not be earned by advances on sound security.
Construction work on the Melbourne tramways and other public utilities had ceased in 1889. Early in 1890 building of all kinds stopped suddenly and absolutely. Half-finished houses fell into ruin. Public works were cut off short in 1891 when London ceased to lend. Unemployment was universal and clamant. Certain to be withdrawn at the end of its term of one, two or three years, the British money had in its rebound a fatally disintegrating effect on the solidarity of the banks. The Union, the Australasia, and the big Sydney banks, which had limited or reduced their overseas liabilities, dared not come to the aid of their more adventurous associates.
A withdrawn British deposit had to be paid in London by a new export of goods or gold – a much more serious matter that the paying off of an Australian deposit, which though withdrawn from one bank would come in again at another when it came to the pinch in April and May of 1893.
In March of 1892 when the land banks were tumbling down in rows the Associated Banks in Melbourne had published a resolution “That the Associated Banks in Melbourne have agreed upon mutually satisfactory conditions on which they will extend their joint support to any one of their number requiring it.” But when in January 28 1893 the Federal Bank of Australia closed its doors, the Associated Banks, in explanation of their refusal to absorb and liquidate it with open doors, issued another resolution “That the liquidation of one of their number was foreign to their ordinary functions.” This gloss on the previous pledge of solidarity astonished the public. On March 15, the Associated Banks issued a third resolution, intended to calm the dangerous apprehensions aroused by the Federal’s fall: “That the Associated Banks of Victoria will be willing to render financial assistance to each other on such terms and to such extent as may seem justifiable to each of them, if and when the occasion arises.” This the public rightly interpreted as a “Sauve qui peut”.
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‘Sauve qui peut’: a general stampede, panic, or rout.