The 1890s were characterised by a depression that deeply affected many countries across the world. In Australia this depression had in many ways a greater and more lasting impact on the Australian economy than the 1930s depression. This was due in part to the collapse of a significant portion of the Australian financial system. However, the factors that caused this depression are not clear-cut and there is continuing debate over the comparative influence of the different internal and external factors on the course of events.

Economic situation before the depression

Prior to the 1890s, Australia experienced a period of financial stability and strong economic growth. Following the gold rushes in the 1850s, Melbourne became the financial centre of Australia, a position it still held in the 1890s. The onset of rapid economic growth in the 1860s led to high and sustained growth in real GDP and investment in the 1870s and 1880s, driven in large part by high population growth during these two decades. Gold had been Australia’s leading staple in the 1850s, but by the 1870s wool had overtaken it. Strong expansion in the wool industry during the 1870s and 1880s led to the wool cheque comprising just over half of the total value of Australia’s exports of merchandise and gold by the late 1880s and early 1890s. The 1870s and 1880s also saw the largest building boom in Australian history with much of it concentrated in urban centres (Kent 2011). Yet underlying this economic growth were systems that were increasingly fragile and vulnerable to internal and external influences.

Expansion of wool industry

Until the mid-1870s, the pastoral industry was concentrated around the main river systems of eastern Australia, taking advantage of the natural water supplies. The industry was optimistic, having experienced high prices and profits as well as long, continuous runs of favourable weather conditions. It also enjoyed the benefits of the private and public investment that had begun with the economic upswing of the 1860s. From the mid-1870s, the pastoral industry shifted geographically, with sheep flocks spreading northwards and westwards into more arid areas and away from the main river systems. This expansion led to a slowing in growth in the total output of the industry. However, in the 1880s and early 1890s, Australia still supplied just over half of the wool imports of the United Kingdom and nearly half of the wool imports of Europe (Boehm 1971). The expansion also created weaknesses in the system, including the over-production of wool and the overstocking and deterioration of pastures, leaving the industry vulnerable to changes in supply and demand.

Lending practices of banks and non-banks

The financial system by the 1880s was dominated by note issuing trading banks that controlled a large share of the total financial assets in Australia. Savings banks, which were differentiated by being government owned or run by government nominated trustees, controlled only a small amount of these assets (although this was gradually increasing and since 1871 there had been at least one savings bank operating in each of the colonies (Butlin 1986)). The main competitors to the trading banks were the non-bank financial intermediaries such as the land banks and building societies that flourished in the 1880s in response to the building boom. The lack of effective regulation in the banking system meant that it was easier for such intermediaries to enter the market during the building boom and make quick growth and strong profits. These non-bank financial intermediaries were less conservative than the banks and were more willing to lend money for property speculation and development. This was a high risk strategy as these intermediaries did not generally have the liquidity to cover the liabilities on their rapidly expanding balance sheets.

The actions of the non-bank financial intermediaries had a large impact on the practices and prudential standards of the trading banks. With more competitors in the market and a desire to grow their own balance sheets, trading banks rapidly expanded their branch networks, lowered credit standards and took on greater risk by becoming involved in speculative activities such as lending to new land and finance companies. As with the risk strategies of the non-bank financial intermediaries, the risk taken by trading banks did not have the liquidity and capital assets to offset the increased liabilities they had taken on. This left both the trading banks and non-bank financial intermediaries in a vulnerable position at the start of the 1890s.

Further, the building boom ended in the late 1880s, leading to a collapse in property prices and private investment in the pastoral industry and urban development as well as a sharp fall in public infrastructure investment (Fitz-Gibbon and Gizycki 2001). There was an initial shock of failures among the building societies in 1890. When it became clearer that the situation was long-lasting, the land banks and other non-bank financial intermediaries also began to collapse. The increasing number of failures reduced public confidence in financial institutions, and affected the financial sector more generally.

Fall in capital inflow

Another factor that influenced the onset of the depression was the large fall in capital inflow in 1891. The speculation of the 1880s had been fed in large part by an inflow of British capital as Australian banks were unable to fund the dramatic rise in credit with domestic deposits. This left the banks exposed to developments in external capital markets. The Baring crisis of 1890 was one such development that reduced the availability of British credit to the Australian market. Barings – a London discount house – faced bankruptcy in November 1890 due to its large and high-risk exposure in Argentina. Its circumstances caused a change in sentiment among foreign investors and brought attention to all overseas securities. At the same time, Britain entered into a recession which meant that British investors became less willing to lend overseas on the large scale of the previous decade. This made it difficult for the Australian colonial governments to raise new loans in Britain, which in turn led to the Australian private sector encountering difficulties borrowing money.

The fall in capital inflow also had a large impact on the wool industry. The decline in economic activity in Britain in 1890 as well as in Europe and America, who were also large importers of Australian wool, dampened prices. The steady reduction in demand over the following years as these countries felt the impact of a severe depression, combined with the over-stocking of pastures, resulted in an excess supply and the tumbling of wool prices by around one-third between 1890 and 1894. The importance of the wool industry was such that its steady decline in the early 1890s, combined with the collapse of the building boom, slowed the whole of the Australian economy.

Onset of the depression

The onset of the depression in 1891 brought with it a sharp fall in real economic activity. Within the first year of the depression, real GDP, which had been rising rapidly since 1860, fell by around 10 per cent. There was also a substantial and sustained deflation of more than 20 per cent from 1891 to 1897 based on retail prices. Unemployment rose sharply due to the contraction and decline in output of the construction and pastoral industries as well as the trade sector, which reached its trough in 1895. These factors contributed to a fall in the standard of living, which was made worse by the continued population growth through the 1890s. Real GDP fell a further 7 per cent in 1893, coinciding with the banking crisis.

The depression in Australia reached its lowest point in 1893 at the same time as the banking system experienced a severe crisis. Land banks and building societies that had speculated heavily on the building boom were the first institutions to experience problems. Pope (1991) estimates that between 1891 and 1893, 54 deposit-taking financial intermediaries closed their doors, with 60 per cent closing permanently. The general anxiety and decreasing confidence in the banks caused by the collapse of these institutions was heightened with the suspension and liquidation of the Mercantile Bank of Australia and Federal Bank of Australia, both newer banks closely linked to the property market, on 5 March 1892 and 28 January  893 respectively. However, the banking panic started in earnest when the Commercial Bank of Australia, the largest bank in the colony of Victoria, suspended payments on 5 April 1893.

The Commercial Bank of Australia had been losing deposits since 1892 and suspicions about its weakness prompted runs as public confidence in the banks wavered. Its failure in April 1893 placed pressure on the other banks such that any seed of doubt could trigger a bank run. While some banks survived these panicked withdrawals, others suspended payment. Banks also suspended with other suspending in anticipation of a withdrawal of deposits, particularly British deposits many of which matured at the end of May (Merrett 2013). Within six weeks of the failure of the Commercial Bank of Australia, 13 of Australia’s trading banks had also suspended payment.

Although the banking system was put under great strain by the bank crashes, it did not break down. By August 1893, 12 of the 13 trading banks had adopted reconstruction plans that enabled them to reopen. Although the details of the reconstruction plans differed between the banks, they generally involved a binding agreement with the approval of three-quarters of creditors in which a new company was formed using the old name. The creditors gave up their right to withdraw funds for a number of years while still receiving interest. Meanwhile, the shareholders accepted the loss of capital and agreed to inject sufficient capital to keep the bank solvent. In addition, payments to depositors were deferred to give time to raise new capital (Kent 2011). The reconstruction schemes were successful in that the banks’ creditors were eventually paid in full, with more than three-quarters of deposits, shares and stock repaid by the end of 1901. However, in some cases payment was not made until as late as 1918 and perhaps even as late as the 1920s (Fisher and Kent 1999).

In contrast to the trading banks, savings banks experienced a steady rise in deposits throughout the 1890s. The difference in the two types of institutions may have impacted public perceptions and behaviour towards them as savings banks tended to invest heavily in government securities. La Cava and Price (2021) show that although depositors responded to the depression by withdrawing more money, the account balances did not change much over time suggesting that people at the time were maintaining their deposits.

Effects of the depression and recovery

The bank crashes of 1893, combined with the general economic depression, had a marked effect on the banking and monetary systems. Considerable strain was put on the surviving banks and there was a large-scale reduction in the money supply due to deposits, notes and gold being locked up in the suspended banks. Boehm (1971) suggests that it was not until 1907–1909 that real income per head passed its pre-depression peak. The effects of the depression were long lasting, particularly on the banking system where the heightened competitive environment of the 1880s gave way to a more conservative approach with banks experiencing a long and slow recovery.

Australia’s recovery from the depression did not begin until 1895 but was slowed by the great drought of 1895–1903. This drought highlighted the problems with the expansion of the sheep flocks into arid areas in the 1870s. Over the course of this drought, sheep flocks were reduced by nearly half and it was not until 1931 that the record flock size of 1892 was reached again (Boehm 1971). The agricultural industry was also affected due to poor harvests that reduced the output of the industry and its ability to export overseas. However, agriculture was able to recover more quickly once the drought ended, experiencing a sharp recovery in grain and fodder exports assisted by rising world grain prices.

One of the most important factors in Australia’s recovery was the diversification of the rural sector. Diversification had been recognised prior to the depression as necessary for further growth of the primary industries. In 1889, the Victorian Government introduced a system of annual grants to promote the agricultural, dairying, fruit and wine industries (Boehm 1971). The depression only served to highlight the importance of this aim.

The main avenue of diversification was the rapid development of export trades in products such as frozen meat and butter. The growth in these exports strengthened Australia’s balance of payments and assisted in providing employment opportunities at a time when unemployment was otherwise increasing. In particular, the growth of the frozen meat industry benefited the pastoral industry as it offered a more profitable alternative for disposing excess sheep from overstocking and a fall in demand for wool.

The expansion of gold production was another important factor in Australia’s recovery. Although wool surpassed gold as Australia’s leading staple in the 1870s, gold remained Australia’s second most important staple throughout the 1880s and 1890s. The discovery of gold at Coolgardie and Kalgoorlie in 1892 and 1893 respectively came at a vital time for the Australian economy, particularly for Western Australia where recovery from the depression was faster than in the eastern states. The positive economic effects also spilled over to the eastern states. Unemployed workers moved from the east to the west attracted by the opportunities offered by the gold fields, which led to a growth in population and an expanded export market in Western Australia. The gold that was produced afforded real and monetary support to Australia’s balance of payments and monetary system through both the rise in gold production and the attraction of British capital to the mining companies in Western Australia.

Despite these factors, the Australian economy did not significantly recover until after the great drought ended in 1903. From this point, recovery was rapid, with the economy moving into boom conditions by 1909, and real aggregate produce surpassing its 1890 level in 1904 and real income per capita in 1907 (Butlin 1970).

This information is drawn from records held by the Reserve Bank of Australia and the following sources:

Boehm EA (1971), Prosperity and Depression in Australia 1887–1897, Oxford University Press, Oxford.

Butlin NG (1964), Investment in Australian Economic Development 1861–1900, Cambridge University Press, Cambridge.

Butlin NG (1970), ‘Some Perspectives of Australian Economic Development, 1890-1965,’ in C Forster (ed), Australian Economic Development in the Twentieth Century, George Allen & Unwin, Sydney, pp 266–327.

Butlin SJ (1986), The Australian Monetary System 1851 to 1914, Ambassador Press, Sydney.

Fisher C and C Kent (1999), ‘Two Depressions, One Banking Collapse’, RBA Research Discussion Paper No 1999-06.

Fitz-Gibbon B and M Gizycki (2001), ‘A History of Last-Resort Lending and Other Support for Troubled Financial Institutions in Australia’, RBA Research Discussion Paper No 2001-07.

Kent C (2011), ‘Two Depressions, One Banking Collapse: Lessons from Australia’, Journal of Financial Stability, 7, pp 126–137.

La Cava G and F Price (2021), ‘The Anatomy of a Banking Crisis: Household Depositors in the Australian Depressions’, RBA Bulletin, March.

Merrett DT (1989), ‘Australian Banking Practice and the Crisis of 1893’, Australian Economic History Review, 29(1), pp 60–85.

Merrett DT (1991), ‘Financial Institutions Under Pressure: Are the Right Lessons being Learnt from the 1890s?’, Economic Papers, 10(1), pp 1–10.

Merrett DT (2013), ‘The Australian Bank Crashes of the 1890s Revisited’, Business History Review, 87(3), pp 407–429.

Pope D (1991), ‘Bank Deregulation Yesterday and Today: Lessons of History’, Australian National University Working Papers in Economic History, 156.

The majority of the records relating to the period of the 1890s depression can be found in the Savings Bank of New South Wales and Government Savings Bank of New South Wales series with a small number in the Queensland Government Savings Bank series. These records are predominantly bank depositors’ ledgers, which contain information on depositor behaviour throughout this period. In addition, trustee papers, trustee minute books, balance sheets and mortgage records from the Savings Bank of New South Wales contain data and commentary on this period.