RDP 2001-07: A History of Last-Resort Lending and Other Support for Troubled Financial Institutions in Australia 6. The 1890s Depression

The depression, which saw real GDP fall 17 per cent over 1892 and 1893, and the accompanying financial crisis, which reached a peak in 1893, were the most severe in Australia's history. The overextension of the 1880s property boom and its unravelling led to an abrupt collapse of private investment in the pastoral industry and urban development and a sharp pullback in public infrastructure investment. A fall-off in capital inflow from Britain, adverse movements in the terms of trade and drought in 1895 accentuated and prolonged the depression.

The 1880s property boom was financed by rapid expansion in bank lending. In addition, many building societies and property finance companies, known as ‘land banks’, sprang up during the 1880s. The increased competition from such new entrants weakened banks' prudential standards (Merrett 1989). While some recognition of this came in 1888, when the Associated Banks increased interest rates and adopted stricter capital standards, for many financial institutions the damage already done was too severe to be repaired (Boehm 1971).

The collapse in property prices in 1889 led to a spate of building society failures in 1890. As it became clearer that the fall in property prices was not just a temporary fluctuation, the financial collapse spread to the land banks. As the number of failures and frauds grew, public confidence in financial institutions faltered, spreading the crisis to the institutions at the core of the financial system – banks that issued their own bank notes.

Counting banks as any institution that called itself a bank and solicited public deposits, 54 of the 64 institutions operating in 1891 had closed by mid 1893; 34 of these closed permanently. Defining banks more narrowly, to exclude institutions more akin to building societies, only nine of 28 banks remained open continuously throughout the 1890s. Of the banks that suspended payment, six closed permanently (either failing outright or being taken over). Several of the banks that reopened were later taken over by stronger banks. At the height of the crisis in April and May 1893, the banks that suspended payment accounted for 56 per cent of deposits and 61 per cent of the note issue in the six Australian colonies (Butlin 1961a).

6.1 Bankruptcy Law

The widespread runs on building societies and land banks, which were forcing institutions to conduct fire sales of assets, prompted both the NSW and Victorian Governments to pass emergency legislation revising liquidation procedures in 1891. The aim of the legislation was to give financial institutions more time to resolve their difficulties by delaying bankruptcy proceedings and deferring depositors' claims. In NSW, the legislation provided that any single creditor's ability to force compulsory liquidation could be overridden by an agreement amongst a numerical majority of creditors holding three-quarters of a company's liabilities. The Victorian arrangements were slightly different. The Voluntary Liquidation Act (which was passed on 3 December 1891 and applied for one year) provided that compulsory liquidation of a company could only go ahead if one-third of creditors, both by number and by value of shares, joined in application to the court.

That Victoria's requirements were expressed in terms of both the number and the value of shares made meeting the conditions needed to press for liquidation nearly impossible to achieve. This tilted control towards bank directors and left depositors with little option but to agree to defer their claims.[25] The Voluntary Liquidation Act also allowed many companies to be wound-up without any independent investigation. While the pretext of the Act was that companies needed secrecy in order to avoid panicking investors, it allowed past dishonesties to be hidden (Cannon 1966). In contrast, under the NSW legislation bank directors had to at least convince creditors of the soundness of any reconstruction scheme.

In response to public criticism, the Voluntary Liquidation Act was modified in 1892. The revised arrangements provided that, if a scheme of reconstruction were endorsed by three-quarters of creditors it would become binding on all creditors. This brought the Victorian requirements more into line with the NSW arrangements. Importantly (and unlike the NSW model), the court was unrestricted in its duty to see that the schemes of arrangement were just (Boehm 1971).

These temporary liquidation laws opened the way for the banks to implement reconstruction schemes in 1892 and 1893. The details of reconstruction schemes varied across banks, but all followed the same broad pattern. Shareholders were called on to invest fresh capital in the reconstructed bank and were released from liability for calls on unpaid capital from the old bank. The major part of depositors' claims were extended for long periods, generally for a minimum of four years, before any withdrawals could be made, and in some cases these claims were converted into preference shares.

6.2 The Associated Banks' Mutual Support

In December 1891, two small Victorian trading banks, the Metropolitan Bank and the Standard Bank, failed. Both banks applied to the Associated Banks for aid. The Metropolitan Bank, however, suspended payment before its application was considered. The Associated Banks determined that the Standard Bank was in such poor condition that there was no point in delaying its closure and refused to provide support (Butlin 1961a).

The Mercantile Bank of Australia had been weakened by fraud and large loans to its own directors. It approached the Associated Banks for assistance in March 1892. The Association offered to lend £100,000, conditional on the provision of security and full disclosure of the bank's accounts. The Mercantile refused to allow inspection of its books and the offer was withdrawn. The bank closed on 5 March.

The Associated Banks met several times at the end of March 1892 to discuss joint action to allay the growing panic. A number of the weaker banks favoured all members providing an unqualified guarantee to each other. The stronger banks, however, were not willing to take on such an open-ended obligation. In the event, the Association publicly announced ‘the Associated Banks in Melbourne have agreed on mutual satisfactory conditions on which they will extend their support to any of their number requiring it’.[26] The press interpreted this as virtually a blanket mutual guarantee and the statement was successful in alleviating panic. The conditions under which support would be provided were not published. These conditions limited support to ‘a reasonable amount upon the sound basis of approved securities’.[27] The guarantee, therefore, was of little practical substance.

The Associated Banks also considered a proposal for joint action in lending to those depositors whose funds were frozen. The banks resiled from the prospect of a rush of holders of frozen deposits many of whom would, even in good times, be refused finance (Butlin 1961a). The proposal was not acted upon.

In January 1893, the Federal Bank failed. It was the smallest and weakest of the Associated Banks. In 1885, it had been granted a share of government business that allowed it to become a member of the Associated Banks. In 1889, the Associated Banks changed their rules to exclude any bank with direct ownership links to a building society. To remain in the Association, the Federal Bank sold its stake in the Federal Building Society. Continuing links between the management of the bank and the building society, however, created suspicion in the public mind. In the 10 months up to January 1893, the bank lost a third of its Australian deposits.

Some banks supported proposals that the Associated Banks take over the Federal Bank, no matter what the cost, for fear that the closure of the bank (which would impose losses on the Federal Bank's British depositors) would see all Australian banks lose their British deposits. The Anglo-Australian banks, however, argued that British depositors might be more alarmed if they discovered that the Associated Banks had taken over the Federal Bank to conceal its insolvency, since such action would suggest that the Melbourne banks had much to hide (Blainey 1958).[28] The Associated Banks attempted to persuade the Bank of Victoria to take the bank over, while the National Bank of Australasia, the Bank of Adelaide and the City of Melbourne Bank inspected the bank with a view to buying parts of its operations. When these attempts failed, the Association was invited to jointly undertake the liquidation of the bank. The Associated Banks responded that they would only consider supervising the liquidation of the Federal Bank if directors would guarantee almost half of the bank's uncalled capital (an amount of £400,000) (Holder 1970). The directors were unable to give such a guarantee. The Association, therefore, stated that ‘the liquidation of one of their number was foreign to their ordinary functions, and as liquidation had become inevitable, under any circumstances it had better proceed in the ordinary manner’.[29] Although all depositors were repaid in full in the liquidation of the bank, the Associated Banks' statement undermined their public statement of 28 March 1892 offering support to all of its members. This prompted runs on those members of the Associated Banks that were suspected of being weak, especially the Commercial Bank of Australia.

The Victorian Treasurer, CD Carter, met with the Associated Banks and pleaded for some public gesture of mutual aid. The result was a public statement on 14 March 1893, declaring that they ‘have agreed to act unitedly in rendering financial assistance to each other, should such be required; and that the Government of Victoria have resolved to afford their cordial co-operation’.[30]

Again, the press interpreted this as a sweeping mutual guarantee. However, the superintendent of the Bank of Australasia, who had not been represented at the Association's meeting, argued that the refusal of the Associated Banks to support the Federal Bank had destroyed any value in such assurances unless the banks were prepared to specify the degree of support they would give. As a result, the Associated Banks re-conferred and issued a clarification of their agreement the next day: ‘that they will in the future, as in the past, be willing to render financial assistance to each other on such terms, and to such an extent as may seem justifiable to each of them, if, and when the occasion arises’.[31] This made it clear in the public mind that there was no guarantee. Doubts also arose about whether the government was strong enough to guarantee the Commercial Bank, particularly since the Treasurer's action was not endorsed by the Premier. Deposit runs intensified.

The Commercial Bank had been the fastest growing bank during the 1880s. By September 1892 it accounted for 17 per cent of total bank assets in Victoria. It had also lent heavily to building societies. For over a year its deposits had been draining away. The three largest banks – the Union Bank, the Bank of Australasia and the Bank of NSW – canvassed possible means of arresting the outflow of deposits from the Commercial. One proposal was that the three banks reduce interest rates on deposits, though this risked undermining confidence in those banks that could not match the interest rate reduction. Another proposal was to refuse to take new deposits for amounts greater than £300 (Holder 1970). The acceleration of Commercial's problems overtook further consideration of these proposals.

On 28 March, the Victorian Government proposed a fund be formed that would be available to any bank requiring help.[32] Based on this model, the Associated Banks offered £1.9 million in assistance to the Commercial Bank. The Commercial argued that the assistance was insufficient and demanded the Associated Banks undertake to meet all of its deposits (which were around £11 million, 10 per cent of all bank deposits in Australia) and make a public declaration of their open-ended support (Wood 1990). The Commercial also sought a public guarantee of government support. The government declined to offer such an unqualified guarantee, Premier Patterson opining that the closure of the Commercial would not have ‘any serious consequences’ (Cannon 1966). The bank suspended payment on 5 April adopting a reconstruction plan that allowed it to re-open fully on 6 May.[33]

Also in April, the bankruptcy of the general manager of the Colonial Bank triggered a run on the bank, even though the bank itself was sound. The Colonial sought the transfer of £50,000 of government deposits from each of the six members of the Association that remained open. On 17 April, the Associated Banks (and the Bank of NSW) offered a much smaller amount of assistance: a loan of £75,000 in coin, for six months, on the security of the title deeds to the bank's branches and the transfer of £75,000 in government deposits to the bank (Blainey 1958). This enabled the Colonial Bank to stay open until the May banking holiday.

The City Bank of Sydney also came under pressure in April and sought assistance from the other Sydney-based banks. The amount required was not large and the banks agreed to provide support. The Australian Joint Stock Bank, however, found itself in greater difficulty. It sought assistance from the Commercial Banking Company of Sydney, the Bank of NSW, the Bank of Australasia and the Union Bank, requesting £2 million and raising the possibility of eventually needing an additional £1 million. Given just one day to respond to this request, the four banks refused to take on such a large liability (Holder 1970). The refusal of the banks to support the Australian Joint Stock Bank undermined the confidence built up by the publicity that had followed the support of the City Bank. A brief run on the other Sydney banks ensued, but the banks were able to meet withdrawals and the run ebbed away in a day or two.

6.3 The Victorian Government's Response

In March 1893, the Victorian Treasurer (who was a director of the Bank of Victoria) tried to form a tighter alliance among the five members of the Associated Banks that were headquartered in Melbourne, suggesting that they withdraw from the full association and pledge all their resources to any of the five whose coin was depleted.[34] In return, the government offered to concentrate all its funds in those banks. The five banks already held half the government's deposits and so did not regard this as providing much benefit, particularly since the government refused to forgo interest on its deposits (Blainey 1958). The banks, therefore, did not take up the Treasurer's plan.

At the end of April, the National Bank of Australasia privately advised the Victorian Premier that it intended to suspend payment. The Victorian Cabinet met and declared the whole week a banking holiday. Many believed the main motive for calling the holiday was the government thought reconstruction of several of the remaining banks was inevitable and that the holiday would give those banks time to draft their reconstruction schemes (Holder 1970).

The Union Bank and the Bank of Australasia defied the bank holiday, and by the end of the Monday runs on their accounts had eased.[35] After closing on the Monday, the Bank of NSW re-opened on the second day of the holiday. The banks with branches in several colonies presumably realised that panic would be created among depositors in other colonies if they joined the bank holiday. By the end of the week, all banks, except the Colonial (which suspended payment on 6 May), had re-opened. On 5 May, the suspended banks that held government deposits released a proportion of those deposits to strengthen the Associated Banks that had not closed (Blainey 1958).

The Victorian Government was more willing to provide direct support to savings banks. In 1853, the Savings Bank of Port Phillip had been restructured into a system of Commissioners' Savings Banks, and a second savings bank, the Post Office Savings Bank, was established in 1865 with more direct and definite government backing for depositors.[36] The Commissioners' Savings Banks were large creditors to the Commercial Bank of Australia. In April 1893, depositor runs on the Commissioners' Savings Banks saw them run down their cash reserves and the Commissioners sought government aid. In return for a government guarantee and the provision of the necessary funds, the government required that the Commissioners' banks be amalgamated with the Post Office Savings Bank, and that the Commissioners hand over to the Treasury the cash and bank deposits they held with those Associated Banks that had not suspended payment. The Commissioners agreed to these conditions. With the government guarantee announced on 29 April 1893, the savings banks were specifically exempted from the bank holiday called in the first week of May.

6.4 The NSW Government's Response

Holders of bank notes were not, prior to the crisis, afforded the protection of having first claim on banks' assets in NSW.[37] On 3 May 1893, the NSW Government passed legislation that provided that all bank notes were to be a first charge on banks' assets and the notes of any solvent bank might be declared legal tender. While this increased the liquidity of the notes by requiring merchants to accept bank notes as payment for goods, it stopped short of a complete government guarantee of the banks since bank notes were required to be convertible into gold on presentation at each bank's head office. The banks resisted the government's intervention arguing that this would exacerbate public doubts about the banks. To mollify the banks' opposition, the legislation provided that no bank's notes would be declared legal tender unless it specifically requested assistance. The major banks held back from seeking such assistance for fear that the public would interpret such a request as a sign of weakness (Butlin 1961a).

Only one bank, the City Bank of Sydney, was anxious to have its notes made legal tender. To avoid singling out the City Bank, the government made a deposit with the bank large enough to meet its liquidity requirements for at least six months (Boehm 1971). But the run on the surviving banks in NSW continued.

In the face of the Commercial Banking Company of Sydney declaring its intention to suspend payment and reconstruct, the government promised assistance if the bank remained open and threatened to remove government deposits and concentrate its support on the Bank of NSW if the Commercial suspended payment. Nevertheless, the Commercial did suspend payment.

The government then overrode the banks' objections and declared the notes of all banks that were still open legal tender for six months from 16 May 1893. In October, Governor Dibbs indicated that he was prepared to extend the proclamation if required. Such an extension risked creating fresh doubts about the banks' ability to ultimately honour their notes. Instead, legislation was passed which placed limits on the total issue of bank notes and made the notes legal tender throughout NSW, except in Sydney. This saved banks the risk and expense of distributing coin across the colony (Holder 1970). Declaring bank notes legal tender freed up banks' reserves of coin. In June 1893, bank notes in circulation amounted to £1.3 million, almost 30 per cent of the value of coin and bullion held in NSW. The expansion in liquidity also allowed the banks to move coin to meet depositors' demands in other colonies.

The NSW Government took two further steps to bolster liquidity. Firstly, to mobilise gold held by the Australian Joint Stock Bank while its payments were suspended, Governor Dibbs pressured the bank's liquidator to accept notes instead of coin as payment from other banks and required the liquidator to pay gold for Australian Joint Stock Bank notes presented for payment by the other banks.

The government's second step was to issue its own legal tender notes that were made available to the banks for advances against current accounts frozen in suspended banks. The Current Account Depositors' Act was passed on 26 May and gave the Treasury power to pay depositors in Treasury notes redeemable in gold within five years against certificates stating the amount of their credit balances in the suspended banks. Between May and August, note issuance under the Act covered almost 9 per cent of the value of frozen current accounts (Holder 1970).

As well as the problems experienced by the trading banks, the Savings Bank of NSW was subject to runs. Governor Dibbs issued a proclamation stating that deposits in the Savings Bank were fully guaranteed by the government. To ensure greater liquidity, the government also promised that £400,000 of the bank's government securities should be repayable in cash on demand (Griffiths 1930).

6.5 Queensland

Queensland also proposed legislation for government note issue. The aim was not so much to ease financial crisis, which was mild compared to Victoria and NSW's experience, as to tap an easy source of finance for the government (Butlin 1961a).

The Queensland National Bank, the Bank of North Queensland and the Royal Bank of Queensland suspended payment within three days of each other in mid May 1893. These three banks accounted for just over half of Queensland banking assets (and around 8 per cent of Australian banking assets). The Queensland Savings Bank survived a brief run. In Queensland, bank notes were not a first charge on assets. As a result, the surviving banks would not immediately accept notes issued by the suspended banks. This generated a brief liquidity squeeze.

The Queensland Government's response to these events included three measures. First, bank notes became the first charge on assets. Second, following the example set by NSW, the government passed legislation authorising the Treasury to make advances secured against deposits in banks that had suspended payment (Teare 1925). The third, and most substantial step, which drew from Queensland's experience in the 1860s, was the introduction of a government note issue. In Queensland, Treasury notes were supplied to banks that paid 25 per cent of the notes' face value in gold. The notes were declared legal tender. A government monopoly over note issue was established by increasing the tax on private bank note issues from 3 per cent to 10 per cent (Mackay 1931).

Strong links between the Queensland National Bank and members of the Queensland Parliament saw the bank receive considerable government support throughout the 1890s, well after the broader financial crisis had passed. Thomas Mcllwrath was a member of the bank's board for five years before becoming Premier in 1879. The same year the bank was awarded all of the Queensland Government's business. In April 1892, the proceeds of Queensland Government loans raised in London were used to meet depositor withdrawals from the bank. A run by Scottish depositors in May 1893 prompted the bank to suspend repayment and reconstruct.[38] The government auditor inspected the books and reported that the bank was definitely solvent. The government therefore agreed to a scheme of reconstruction, which locked up £2 million of its deposits (which accounted for around one-fifth of the bank's total deposits) for between 6 and 12 years.

During 1894 and 1895, the bank's losses were concealed by accounting fraud. In 1897, a government-appointed committee investigated the bank and found it to be deeply insolvent. The committee did not, however, recommend liquidation, as it believed that the best return to creditors could be achieved by keeping the bank open. Realising that publication of the committee's report would precipitate a run on the bank, the government passed the Queensland National Bank Limited Guarantee Act, which guaranteed all deposits for a year. Under the second scheme of reconstruction, the government's deposits were to be repaid from the bank's profits in stages between 1897 and 1921. In the event, the government was fully repaid in 1918 (Blainey 1958).

6.6 Discussion

The 1937 Royal Commission into Monetary and Banking Systems argued:

It is possible that a strong central bank (had such then existed) might have been able to limit the unhealthy expansion that eventually brought about the crisis. It is possible also that when the crisis was imminent prompt and decisive action by a central bank might have limited its effects to those institutions that were actually insolvent, and have gained time for others that were sound to rearrange their affairs in an orderly manner without suspension.[39]

Criticism has been levelled at the Associated Banks for not providing more support to troubled institutions (Gollan 1969). Four main factors hindered the Associated Banks' ability to act as an effective lender of last resort: competition between banks, doubts about the fundamental solvency of those banks that suspended payment, resource constraints and the Association's inability to constrain its members' risk-taking.

From a competitive perspective, it was not in the interests of the strongest banks (operating with high liquid reserve ratios) to help the weaker banks (Pope 1989). Particularly since, at least in the early stages of the crisis, customers were able to differentiate between institutions (the most severe runs were on banks most heavily exposed to property and property financiers) and funds were transferred from the weaker banks to the older, more conservative banks (Merrett 1991). The banks themselves grappled with the conflict between the need to buttress public confidence and giving undue aid to their competitors. For example, in March 1892, the superintendent of the Bank of Australasia wrote:

Had these banks [the Federal, Commercial and City of Melbourne Banks] closed their doors…there is no saying where the crash would have stopped, and in any case the depreciation in values would have been so great as to entirely throw into the shade any benefits which we would have derived from acquiring new accounts from the failed institutions.[40]

Secondly, the dramatic fluctuations in property prices during the years immediately preceding the banking crisis made it difficult to assess the banks' true value. At the time, some argued that the banks that suspended during April and May 1893 were, from a longer-term point of view, solvent (Boehm 1971). Others, however, such as Merrett (1991), argue that most of the banks that suspended were insolvent. Pre-crash property prices were excessively high and could not be used as a basis for valuing troubled banks (in fact, property prices took up to two decades to recover to the levels seen at the height of the boom during the late 1880s (Murray and White 1992; Cannon 1966)).

Thirdly, since the liquidity of the banks was constrained by the supply of gold and coin, the Associated Banks faced binding resource constraints. Commercial prudence dictated that they could only offer small amounts of last-resort support to demonstrably sound institutions. While the solvent banks possessed the resources necessary to save those banks that suspended payment, to do so would have left the rescuing banks with only a slim margin of capital. The capital ratio of the Victorian banks would have shrunk to less than 1 per cent (Merrett 1993). The loans to the Colonial Bank by the Associated Banks and to the City Bank by the larger Sydney-based banks indicated that, where the provision of assistance could be comfortably met from the banks' resources, they were willing to provide support.

Lastly, the Associated Banks lacked effective mechanisms to constrain moral hazard-driven behaviour among its members. Unlike the Clearing House Association in New York, which coordinated effective bank rescues around the same time, the Associated Banks did not impose any prudential requirements, such as minimum capital ratios and the publication of audited accounts, on its members (Merrett 1993). The Association's revision of its rules to exclude banks with ownership interests in building societies from its membership was one attempt to keep the more risky institutions out of the Association. The links maintained between the Federal Bank and its former building society affiliate, however, demonstrated that such attempts had little practical effect.

Having the option of reconstruction available to them, several banks did not seek assistance from the Associated Banks before suspending payment. The schemes of reconstruction (which were a combination of public policy and market-based solutions to the crisis) were criticised for placing too much burden on banks' depositors and other creditors (Pope 1987). However, the schemes were successful in bringing the crisis to an end. Reconstructed banks were able to re-open quite quickly. On average it took two months for the banks to resume business fully and several banks re-opened to accept deposits on behalf of trusts associated with the reconstructed bank within a few days of suspending payment (Mackay 1931). If the banks had been put into liquidation, they would have been forced to realise assets at the worst possible time. Reconstruction provided greater certainty about the losses faced by both depositors and shareholders than liquidation. The schemes did allow substantial injections of fresh capital into the banking system.

Although depositors bore losses indirectly due to the freezing of accounts, all unsecured creditors of reconstructed banks were eventually repaid in full. More than half of the £32 million of suspended deposits, preference shares and interminable stock held in Australia had been repaid by the end of 1896, and more than three-quarters by 1901 (Merrett 1991). Full payment of suspended deposits was not finalised in some cases until as late as 1918 (Fisher and Kent 1999). £4.6 million interminable stock, however, was still outstanding in 1936 (Royal Commission into the Monetary and Banking Systems 1937). Most preference shares had been extinguished by bank mergers by 1936. However, in the case of the Commercial Bank of Australia, £2.1 million in preference shares remained on the bank's books until its merger with the Bank of New South Wales in 1982.

Three factors mitigated the losses borne by depositors. Firstly, secondary markets in deferred deposit receipts developed, allowing depositors to realise their deposits at a discount. Secondly, all bank notes and most current accounts were exempted from the reconstruction schemes (Merrett 1991). Thirdly, in a number of instances the courts modified reconstruction schemes in response to appeals from depositors (Mackay 1931).

Directors also bore some of the costs as reconstruction schemes involved changes in the composition of bank boards. In a number of cases, representatives of depositors were appointed to the board of the reconstructed banks.

The Victorian Government was criticised for its decision to call the banking holiday, and for its failure to adopt policies to bolster liquidity in the colony as NSW had done. If the stronger banks had observed the holiday, the weaker banks had quickly reconstructed and other steps been taken to improve the public's confidence in the banks, the banking holiday may have been effective. The Australasian Insurance and Banking Record, however, characterised the decision to call a banking holiday as ‘floundering’ on the part of the government, based on the ‘principle that in order to put out a fire the right thing is to shower petroleum upon it’.[41] The three smaller Victorian banks that complied with the banking holiday were all forced to suspend payment and reconstruct later in the same month. The banking holiday, therefore, did not succeed in its attempt to buy time for those banks. Moreover, declaration of the holiday sparked runs on those banks that did choose to remain open, although those banks were able to withstand the deposit outflows. The failure of the holiday supports Bagehot's prescription that crises in public confidence should be met by generous provision of liquidity. The holiday had done the reverse by freezing all liquid funds other than coin.

At least three reasons may be adduced for the Victorian Government's reticence to adopt policies similar to those implemented in NSW. Firstly, the links between the banks and several Members of Parliament meant the government lacked the will to push ahead with proposals opposed by the banks (as Governor Dibbs had done in NSW).[42] Secondly, Dibbs' actions cut across the economic orthodoxy of the time, which carried a strong bias against government intervention and particularly against inflationary policies of any type. Thirdly, the depression weakened the government's own financial position limiting its capacity to provide direct support. Coghlan (1918) suggests that, had the credit standing of the colonial governments been stronger, they may have been better placed to help. In the face of mounting pressures for greater budget constraint, Victoria was particularly awkwardly placed following a period of ‘excessive and imprudent borrowing’ for public works (Boehm 1971).

In the absence of more effective Associated Banks or government intervention, the market itself developed means of mollifying the effect of the crisis. The reconstructed banks set up trust operations quarantining new deposits from those frozen under reconstruction schemes. Secondary markets in bank claims helped to make frozen deposits more liquid.


That the Victorian Government's legislation more strongly favoured the interests of bank owners is largely attributable to the heavy involvement of the leading Members of Parliament in the activities of frail land companies and banks. [25]

Text reproduced in Australasian Insurance and Banking Record, 18 April 1892, Vol 16, p 245. [26]

Text reproduced in Australasian Insurance and Banking Record, 18 April 1892, Vol 16, p 245. [27]

The Anglo-Australian banks were headquartered in London, but conducted the bulk of their business, particularly their lending, in Australia. While almost all Australian banks obtained funds from British depositors, the Anglo-Australian banks were particularly dependent on British finance. [28]

Text reproduced in Australasian Insurance and Banking Record, 18 February 1893, Vol 17, pp 74–75. [29]

Text reproduced in Australasian Insurance and Banking Record, 18 March 1893, Vol 17, p 153. [30]

Text reproduced in Australasian Insurance and Banking Record, 18 March 1893, Vol 17, p 153. [31]

The assistance was to be made up of direct advances of £100,000 by each member bank, an advance of the same amount by the Bank of NSW (which was not a member of the Association), and transfers of government deposits of £100,000 by each member. [32]

The bank re-opened in a limited capacity on 8 April. Its business was confined to taking deposits that were placed in new accounts held in trust (Australasian Insurance and Banking Record, 18 April 1893, Vol 17, p 40). By this means, the bank was able to stem the loss of customers prior to the formal opening of the reconstructed bank (Wood 1990). [33]

The five banks being the National Bank of Australasia, the Commercial Bank of Australia, the Bank of Victoria, the Colonial Bank and the City of Melbourne Bank. Excluded from the proposed scheme were the four English-based banks operating in Victoria: the Bank of Australasia, the English, Scottish and Australian Bank, the London Chartered Bank of Australia and the Union Bank. [34]

Both of these banks had large investments in London, which they drew on to bolster their cash reserves. In addition, the Union Bank was given a stand-by line of credit of £1 million by the Bank of England, but it did not draw on this (Butlin 1961b). [35]

Each branch of the Savings Bank of Port Phillip was constituted as an independent entity. The five Commissioners of the bank (who were appointed by the Colonial Governor) appointed local trustees to manage each branch. In contrast, the government had direct control over the Post Office Savings Bank's deposits, which were paid to the Colonial Treasurer and placed in a trust fund before being invested in government bonds. [36]

Victoria and South Australia introduced this requirement in 1888 and 1889 respectively. [37]

When British depositors withdrew their money in December 1891, the bank received a last-resort loan from the Bank of England (Blainey 1958). [38]

Royal Commission into the Monetary and Banking Systems (1937, pp 100–101, paragraph 215). [39]

Quoted in Butlin (1961a, p 289). [40]

Australasian Insurance and Banking Record, 19 May 1893, Vol 27, p 299. [41]

For example, at least nine of the 14 members of the Legislative Council also served as bank directors during the early 1890s. [42]