RDP 9303: The 1893 Bank Crashes and Monetary Aggregates 5. Liquidity of Long-Dated Bank Liabilities

It was argued above that the long-dated deposit receipts and deposit stock should be netted out from the money stock in view of the extension of the maturity of these liabilities. The series of M2 and M3 presented above in Table 4 represent the lower bound of monetary aggregates. While these 1893 bank deposits were ‘locked up’ as a different type of liability, they might still be considered as part of the stock of money. They possessed a degree of liquidity from late 1893 as a secondary market sprang up in these claims. Bank deposit receipts and stocks were traded on the Sydney Stock Exchange by September while these securities were placed on the official lists of the Sydney and Melbourne exchanges in December. The Official List of the Stock Exchange of Melbourne indicates that these stocks were traded on a daily basis in the first week of December^[12]. A number of banks accepted deposit receipts at face value in settlement of their customers' outstanding debts. Private investors entered the market, particularly as rates offered by trading banks on their 24 month term deposits fell from 5 per cent in August 1893 to 3 per cent by October 1894 (Butlin et. al., 1971, Table 51 p. 494). Investment in deferred deposit receipts paying 4.5 per cent and debentures and stock paying between 4 and 4.5 per cent offered attractive yields if these liabilities could be purchased at a discount to their face value.

It has been possible to calculate the ‘market value’ of the outstanding liabilities of each bank at December of each year by multiplying the figures shown in Appendix C by the published price^[13]. The resulting ‘market value’ series, shown in Table 5 (details for individual banks appear in Appendix D), is a weighted average of the individual bank series. This series could be analogous to the value of certificates of deposit and so included as part of monetary aggregates. It is clear that these assets were not as ‘liquid’ as bank deposit liabilities insofar as there was a spread between bid and ask prices. Furthermore, the instability and unpredictability of the means suggests a level of uncertainty about market price (Juttner 1987, pp. 86–87).

While no data on the volume of trades are available, it is likely that the market was ‘thin’. Accepting these caveats, including this estimate of the value of the ‘certificates of deposit’ to the currency in the hands of the public and the unencumbered deposits held by trading banks within Australia would provide a generous upper bound for estimate of the stock of money from 1893 until 1914. The resulting series is shown in Table 6.

Even this upper bound calculation of M2* and M3* suggest a more severe contraction in monetary aggregates than the series produced by Schedvin. M2* contracted by 23 per cent in 1893 while M3* fell by 17.5 per cent over the same year. Once again, there was little difference between this and the other series with respect to the number of years elapsed before the earlier peaks were matched in nominal terms.

Footnotes

For an account of the market see AIBR (1893), pp. 858, p. 1088 and p. 1101 and (1895), pp. 81, pp. 149–150 and p. 163. Official List of the Stock Exchange of Melbourne held in University of Melbourne Archives. [12]

Price data was collected as quoted for December of each year where possible. If no quotation was available for that month the nearest date on either side was used. Prices were drawn from those quoted in the monthly stock exchange list in the AIBR and the annual survey of the Stock Exchange of Melbourne as reported in the Argus and Age newspapers. [13]