Australian Banks Endured a Depression in the 1890s

The second of two parts.

Last month’s article left off with Australia’s surge of investments and banking after the discovery of gold there. Australia’s economy and population expanded for 40 years but in the 1890s a depression swept across the world.

Riding on the gold boom, many banks in Australia loaned without hesitation or much restraint. They ultimately over-speculated to a degree that was beyond recovery. In the 1880s, Australia had a land boom, and real estate prices matched that of London. Private banks lent far more money than they could realistically support. At the time, there was minimal guidance or restrictions on what reserves were required for banks. Many of the private banks carried a small fraction in reserves of what they were lending. Once the demand for properties in Australia began to falter, the private banks began to declare bankruptcy.

When the Commonwealth Bank became the first bank issuing notes backed by a federal guarantee, it was unable to produce a national issue quickly enough. So the government bought private issue notes and superscribed them with “Australian Note Payable in Gold Coin at the Commonwealth Treasury at the seat of the Government.” Click image to enlarge.

The Australian banking crisis of 1893 forced many banks to close their doors temporarily to help stop runs in which people demanded their money in gold instead of the banks’ paper currency. Fortunately, the depression was short-lived in Australia. Instead of making the banks liquidate their assets and pay back their creditors, the banks and the local government agreed to rebuild the banking sector with practices that were more sound. The changes included requirements that creditors receive more securities to be redeemed later and possible shares in the companies. Another measure to help fight the problems of these turbulent times was the issuing of treasury notes by the governments of Queensland and New South Wales. The newly reformed banks brought Australia out of the depression.

In 1901, Australia became a federation in which its separate states became unified but retained their separate state boundaries. Australia wanted to have total control over the issuing of notes and to have a currency that was accepted across the unified country. In 1910, the federation passed legislation to regulate the private banking industry. The legislation gave Parliament total control over legal tender, which was given to the Commonwealth Treasury to supervise. Shortly after the Commonwealth Bank Act of 1911 was passed, the Commonwealth Bank was formed. This was the first step toward a central bank for Australia. The Commonwealth Bank was the first bank issuing notes backed by a federal guarantee. Otherwise, it was set up as a normal commercial bank.

Australia couldn’t produce a national issue quickly enough, so the government bought private issue notes and superscribed them with “Australian Note Payable in Gold Coin at the Commonwealth Treasury at the seat of the Government,” making the notes the first currency usable throughout the nation. From 1913 until 1924, the Commonwealth Treasury issued notes. Then, from 1924 until 1960, notes were issued by the Commonwealth Bank as it took over central bank functions even as it continued to also operate as a commercial bank.

Ultimately, the conflict of interest of being a commercial bank and a central bank became apparent. This was partially why the Reserve Bank of Australia was formed and took over the country’s central banking functions in 1960. The Commonwealth Bank continues to exist as a commercial bank today.

The Reserve Bank later changed the Australian currency to a decimal system to save time when converting it to the currencies of other countries. The Reserve Bank contemplated changing the name of its currency to “Royals” but ultimately decided on the Australian Dollar. The Reserve Bank has continued to provide a stable means of exchange and, when necessary, implemented measures quickly to help stimulate the economy.

The history of Australia navigating the various challenges facing its currency and banking system made for interesting notes to collect as well as making some of its notes quite hard to find. Compare your collection of Australian currency with those on the PMG Registry to see how yours compares.

If you’d like to see more articles about paper money, sign up for free to become a member of the PMG Collector’s Society and then choose the PMG and related e-newsletters to be delivered to your inbox.

Sources

https://museum.rba.gov.au/exhibitions/displays/a-new-currency/

https://www.rba.gov.au/about-rba/history/

https://history.columbia.edu/wp-content/uploads/sites/20/2016/06/Banerjee_Thesis.pdf

https://openresearch-repository.anu.edu.au/bitstream/1885/114788/2/b11758119.pdf

https://www.hbs.edu/businesshistory/Documents/BHR870302.pdf

https://collections.museumvictoria.com.au/articles/2676

https://eh.net/encyclopedia/the-economic-history-of-australia-from-1788-an-introduction/

https://en.wikipedia.org/wiki/Australian_dollar

https://en.wikipedia.org/wiki/History_of_Australian_currency

https://en.wikipedia.org/wiki/New_South_Wales#1788_British_settlement

https://en.wikipedia.org/wiki/Banking_in_Australia

https://en.wikipedia.org/wiki/Commonwealth_Bank

https://en.wikipedia.org/wiki/Reserve_Bank_of_Australia

https://en.wikipedia.org/wiki/Department_of_the_Treasury_(Australia)

If you’d like to see more articles about paper money, sign up for free to become a member of the PMG Collector’s Society and then choose the PMG and related e-newsletters to be delivered to your inbox.