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1901 IN RETROSPECT
26.38 AUSTRALIAN FINANCIAL SECTOR, Comparison of Structures - 1901 and 2000
One of the clearest differences distinguishing the financial system in 1901 from that in 2001 is the degrees of regulation and monitoring that impact on the environment in which financial enterprises operate. In 1901 there was no centralised legislation or institution with prudential authority over banks or other financial institution/activity despite the failure of a number of banks during the 1890s. Nor was there any Australian institution which performed the functions of a central bank. There were a range of different State laws relating to banks, friendly societies and life assurance organisations.
The national accounting framework, which defines and structures our current presentation of information on the financial system, did not exist in 1901, nor did accounting treatments such as consolidation within financial sector and subsectors, and standards such as consistent balance dates for reporting. The absence of these standards makes the application of the current framework to the limited data for 1901 difficult. Nevertheless, there were sufficient statistical data collected to provide a reasonable quantification of the financial system a hundred years ago.
The (State) Banking Acts specified that quarterly statements of assets and liabilities and capital resources were to be provided. With the exception of NSW, State legislation governing life assurance companies required annual statements showing total business, and transactions within their own State. In NSW, life assurance companies were regulated under either the Companies or Friendly Societies Act, or were incorporated by special Act.
In 1901 enterprises such as banks, pastoral companies and building societies offered deposit and lending facilities for housing and business, while life offices and friendly societies insured against loss of life, health and property. Trustee companies managed property in the event of death until inheritance was settled. A number of types of institution that exist now had no counterpart in 1901. There was no central bank or prudential regulator until the 1930s. Merchant banks and futures exchanges did not start operating and separately constituted pension funds were not set up until the 1950s. Highly specialised vehicles such as public unit trusts, cash management trusts and wholesale investment managers had to await an environment and population that would take advantage of the facilities they offered.
Trading banks (i.e. banks which offered cheque accounts and/or issued their own currency in the form of bank notes) were the largest group of financial institutions in Australia in 1901. There were 22 banks operating in Australasia (i.e. including New Zealand). The four largest banks at the time accounted for half the total assets of all banks (£84m). In 1901 these trading banks operated 1,560 branches, although only two banks did business in all States and New Zealand. Trading banks' assets were estimated at £122m and were composed of cash reserves of £19m in coin and £1m in bullion, landed and other property £6m, notes and bills of other banks £1m, balances due from other banks £1m, all other debts due to the banks £94m (including £1m in 'London Funds', Government and municipal securities of £2m and 'adjusted external cash' of £5m). London Funds were liquid assets and played a similar role to deposits with the Reserve Bank in later years, and 'adjusted external cash' took into account banks' holdings of their own bank notes. Trading bank liabilities were estimated at £96m, consisting of notes in circulation of £3m, bills in circulation not bearing interest £0.5m, deposits of £92m (not bearing interest £38m, bearing interest £54m), and balances due to other banks £0.4m. Generally banks held assets to the value of around half their liabilities at call in coin and bullion.
Savings banks' liabilities consisted predominantly of their deposits, estimated at £33m, from 964,553 depositors. Assets consisted of a cash reserve of £0.4m, deposits at State Treasuries £8m, advances £5m, local and semi-government securities £1m, Commonwealth and State government securities £21m. These institutions were supervised closely by State Governments to ensure public confidence; the volume of depositing and withdrawal reflected the role these institutions played in day to day requirements of the general population and small business in a system where cash was the main means of effecting payments. The State government savings banks and those with trustees or commissioners nominated by the State Government had relationships with the post offices that allowed depositors access to their accounts. There were a few banks that allowed depositors to withdraw funds from States other than their own and even by telegraph, an early example of electronic funds transfer.
There were numerous land, building, investment, trading and commercial companies which received money on deposit and transacted business as done by banks of issue. Many of these types of institutions had folded during the 1890s. By 1901 there were still 37 building societies operating in Australia, with total assets £4m, and deposits of approximately £3m.
Although merchant banks have been operating in Europe since the sixteenth century, these institutions did not appear in Australia until the 1950s. However, pastoral finance companies were quite important to the provision of finance to rural areas. There were five principal companies which made £20-25m in rural advances, financed by the issue of £23m in debentures and around £10m in shareholders' funds.
Life assurance companies and societies played a role in 1901 very similar to their present incarnation as life insurance corporations, offering term and whole life cover and annuities - essentially converting long term savings into long term investments. There were 18 companies doing ordinary and/or industrial life insurance business. Their liabilities consisted mainly of their assurance funds. Only three of the 18 companies were partly proprietary, with paid up capital approximately £33m. Their assets consisted of loans on mortgages and policies £22m, and around £11m in holdings of government and municipal securities, freehold property, and cash on deposit.
Friendly societies provided health and death cover, and other long term savings. There were approximately 137 societies, with 3,008 branches (or lodges), and total funds of around £3m.
Other insurance companies mostly transacted marine and fire insurance, along with some guarantee and other business. Total liabilities for other insurance business were around £4m, mostly due to shareholders and policyholders. Investments made by other insurance companies consisted of: loans on mortgage £1m; government securities, debentures and shares £1m; land and other property £1m; and fixed deposits £1m. The balance of assets consisted of cash in bank, on hand and bills receivable £0.2m, and sundry debtors £0.3m.
Finally, there were 14 trustees, executors and agency companies, with £1m liabilities due to paid up capital and reserve funds. Their assets consisted of deposits with government £0.2m; other public securities and fixed deposits £0.1m; loans on mortgages £0.2m; property owned £0.2m; and other assets £0.1m. These companies did not receive deposits and made advances on very rare occasions. They were, however, responsible for £31m in assets at credit of estates.
Quantitative comparisons of financial data over the century since Federation are problematic: the economy, legislative framework and statistical frameworks are very different. Nonetheless, table 26.39 provides some indication of relative size and structure of financial corporations.
In this table institutions have been classified according to the standard institutional subsectors of 2000. As a result, the role of friendly societies in 1901 may be misrepresented. In both 1901 and 2000 friendly societies offered both health insurance and 'death' benefits to members, but the proportions for 1901 are not known.
There are some differences between the three data sources consulted for 1901 data, and some choices have been made. The 1901 data are tabulated in many cases from annual returns with accounting periods which were not always the year ended June. The 1901 data in pounds have been converted to dollars. In the absence of specific price indexes for financial sector products, the growth in retail prices of some 47 times between 1901 and 2000 (see table 28.5 in the section Long-term price series of Prices) may provide a broad order of magnitude for revaluation to 2000 prices.
Because of the large differences in economic and legal structures between the financial system in 1901 and 2000, comparisons are difficult. By scaling the 1901 and 2000 data such that the bank data are the same relative size, the relative change in importance of the other institutions can be seen by comparison with banks. In particular pension funds, other insurance, central borrowing authorities, and financial institutions n.e.c., are the significant new players (graph 26.40).
There is only a small range of data available for financial markets in 1901, reflecting the reliance on intermediated finance at that time. There are some data for government debt securities on issue, share prices and interest rates.
Most debt security issuance during the early 1900s was by the State Governments. The Commonwealth Government did not issue debt until 1911. Government debt securities outstanding issued overseas were £185m at June 1901, which was 58% of the estimated stock of total foreign investment in Australia of £320m (see the article An account of investment in and by the six colonies in International accounts and trade). At 2000 prices the equivalent values would be $18b and $31b. In comparison, at 30 June 2000 general government debt securities held by non-residents were $29.3b, of which only $1.5b was issued overseas. Foreign holdings of general government debt securities accounted for only 4% of total stock of foreign investment in Australia at that date of $677b. Table 26.42 illustrates the development of domestic markets for government securities. Note that debt securities issued by State central borrowing authorities are not included in general government.
The stock exchange was well established by 1901, with exchanges set up in Sydney, Melbourne, Hobart, Brisbane, Adelaide and Perth. The Australian Stock Exchange has compiled a share price index which spans the period 1901 to 2000 (graph 26.41).
This log scale graph shows a remarkably constant rate of growth, with share prices increasing tenfold approximately every 45 years.
Although futures exchanges were well established in America and Europe, insuring against price fluctuations on primary products such as wheat, butter and eggs, there is no sign of any such activity in Australia in 1901.
Table 26.43 shows a range of prices pertaining in financial markets in 1901 and 2000.
Implied bank lending margins were of the order of 3.5 percentage points in 1901 and 4.0 percentage points in 2000. With inflation of about 1.4% per year in 1999, real interest rates were close to nominal rates; for example the real interest rate for small business borrowing was about 7.5%. In 1901 inflation was running at about 9% (see table 28.5 in the section Long-term price series of Prices), and real interest rates were probably negative. The $A has depreciated against both US dollar and GB pound, and the GB pound has also depreciated against the US Dollar.
Money and the payments system
In the early days of the colonies, transactions were made using rum, wheat, tobacco and other items as well as money - which included Spanish dollars as well as English pounds and other currencies. There were also Commissariat store receipts and promissory notes issued by private individuals. The nature of these instruments, their reliability, and their accessibility to the public led to the Bank of NSW being allowed to issue notes; it was followed, eventually, by other private trading banks.
At the time of Federation, an Australian currency did not exist, although the debate about the introduction of a decimal system of currency was already occurring. Coinage was minted by the British Government (quite a profitable sideline) and notes were issued by individual banks, except in Queensland where Treasury notes were issued into circulation by the State Government. However, these bank notes, and Treasury notes, were not legal in any State other than the State in which they were issued.
The modern measures of the volume of money in 1901 and 2000 are shown in table 26.44.
Measures of the volume or supply of money are defined as follows:
In 1901 there was no supervision of the payments system as exists now by the Australian Payments Council. By 1907 there were two clearing houses operating: the Sydney Banks' Exchange Settlement and the Melbourne Clearing House; at these two institutions settlements were effected daily between banks doing business in NSW and Victoria. Settlement would have included both notes issued by other banks as well as cheques drawn on current accounts.
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