Daily Reckoning Contributor

A Reader Writes…

Extracts from the book “The Land Boomers” by Michael Cannon, published in 1966…  Victoria was made rich by gold, and populous by the immigrants who sought it.

Two great economic booms and depressions had already shaken nineteenth century Victoria.  The first occurred shortly after the early Melbourne land sales of 1837, reaching its peak about three years later. The discovery of gold sparked off the second great boom, which reached its peak in the 1850s.  People had money to burn, and either dissipated it in wild extravagance or bought property at inflated prices.  But because of the continuous rich flow of gold, there was comparatively little suffering when the inevitable crash followed.

Then came the land boom of the 1880s.  This time every type and degree of man was involved.  Clergymen, labourers, widows, schoolmasters all grasped at the chance of quick wealth and invested their savings.

The land mania of the 1880s took two main forms.  The first was based on a plethora of building societies, whose optimistic officials were relieved that every family in the colony could simultaneously build their own house, keep up the payments through good times and bad, and support an army of investors who were being paid high rates of interest for the use of their money.  The second form of mania was the deeply held belief that it was impossible to lose money by investing in land, a belief that persists to the present day.

The boom continued to gather strength.  In 1885 the harvest was prolific, the price of wool was high, the railways made a profit for the first time in the colony’s history, and optimism reigned supreme.  A few warning voices were raised overseas, but heard as from afar.

In 1886 it appeared to some of the associated banks that the land boom had reached its zenith and would now plunge downwards.  They became alarmed at the large withdrawals being made to meet land payments, and increased the interest rate on deposits and overdrafts by 1 per cent. For a year land speculation became less profitable

Then in 1887 there began a new wave of speculation, the land boom proper, so forceful that it over-rode all considerations of interest rates.  Land selling in Surrey Hills for 15 shillings a foot in 1884 rose to 15 Pounds in 1887.  Land at Burwood rose from 70 to 300 Pounds an acre.

In the city there was fantastic competition for blocks, fanned by constant reports of fortunes which had been made by holding on to the blocks for a few months and reselling.

Once again the banks, dismayed by wildly fluctuating values, began calling in overdrafts.  Unfortunately, some of the leading banks had encouraged speculation when money was plentiful, and ruthlessly suppressed it when the inevitable reaction set in.  This traditional banking policy, aimed primarily at safeguarding the banks’ own interests, proved utterly ruinous to the general community.

The land promotors began looking elsewhere for easy finance.  Thus the years 1888, 1889 and even 1890 saw the formation of most of the disastrous land and finance companies, and so-called land banks.  Under the loose banking and company laws of the time, they were able to take savings deposits, issue shares, float loans, discount promissory notes and other commercial paper, and in general perform all the functions of an established bank.

The boom soared upwards to dizzy new heights. How could such values last?  The maximum rentals which tenants were willing to pay often amounted to only 2.5% return on the money spent on sites and buildings.  As the boom petered out, many tenants could not pay even that.  A few experienced speculators realised what would happen, and quietly began to sell off their shares and land while there was yet time.

Simultaneously, there began a series of calamitous industrial conflicts between employers and the developing unions, mainly in the maritime and pastoral industries. The strike collapsed.  But business never fully picked up again.

For a few months, many investors still appeared to be hypnotized by the boom.  By the time they realised that the crash was indeed final, practically every land company was in liquidation and calls on their shares had gone forth.  The same pressure was felt by the land banks, many of which owned shares in associated speculative companies.  Some were able to use the public’s cash deposits to stay open a little longer.  But one after another they toppled, the pressure multiplying each day as their depositors took fright and withdrew their cash.  From July 1891, when the Imperial Bank suspended payment, to March 1892, when the Australian Deposit and Mortgage Bank suspended, no fewer than 20 major financial institutions, with liabilities of nearly 20 million Pounds, closed down.

Every day brought news and rumours of fresh disasters, of another land company folding up.  And when they folded, there came the inevitable calls of capital on their partly paid shares to help pay the creditors.

Suicide became a commonplace solution.

By the end of 1891 the bottom had completely dropped out of the land market.

As bank shares and other stocks began to slide in value, the Directors of certain companies sent out dummies to buy their own shares and prop up their value temporarily while the Directors sold their personal holdings.

Said Table Talk, just before Christmas 1892, “Never before in the history of the colony has a Christmas holiday been shrouded in such deep gloom. Shop-keepers complain that their customers appeared to have forgotten that the season of good cheer was at hand, and started on being asked for the accustomed order, as if reminded of the changed condition of their purses that does not admit of luxuries or extras.”

The year 1892 may have been sombre, but the disasters to come in 1893 were quite unprecedented.  Enough misuse of financial power had been revealed to make every man suspicious of the soundest institutions, and to be fearful about the safety of his own bank deposits.  Quietly, and then more quickly, a general run on the established banks began.

Public disquiet was multiplied by the suspension of the Commercial Bank on 7 April 1893, following heavy withdrawals and a slump in the value of its shares.

On the weekend of 29-30 April 1893, the great and powerful National Bank privately advised the Premier that because of the continuous run on its deposits, it intended to suspend business on the Monday.  On Sunday 30 April, Cabinet met secretly and decided to declare the whole week a banking Holiday.  On Monday 1 May 1893, men picked up their morning papers to read the incredible news that the colony’s entire banking system had apparently broken down.

The Angel of Death came early and stayed late in the Melbourne of 1892 and 1893.  The collapse of the boom economy was sudden and dramatic.  As each company closed its doors, it dragged others down with it.  Clerks, surveyors, accountants, builders, and every other kind of employee was thrown out of work, and onto a labour market which was harsh enough in good times, but almost non-existent in bad times.  Their savings ran out, and still there was no work to be had.  Nor was there any form of help, beyond private charity which usually came too little and too late.

In the absence of trustworthy statistics, it is difficult for us today to form a complete picture of the extent of unemployment and the human suffering it produced.  Some contemporary observers claimed that every second man was out of work, but these estimates could only be guesswork. Thousands of people were privately supported by others.  Thousands left Melbourne.  Thousands lived on scraps and municipal handouts.  All we can say for certain is that this was the worst depression in Australian history, before or since.

This correspondence was recently received from a reader of the Daily Reckoning.

Daily Reckoning Contributor

The Daily Reckoning occasionally features commentary from financial analysts, experts, gold bugs, economists and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by your Daily Reckoning editors.

 

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