Finally Putting Up a Picture of Myself and a Fascinating Debate

Yeah, I know I need a haircut and you should all know who she is.....

Anyway, check out this interesting debate from Krugman-in-Wonderland on the Australia Depression of 1893:

Bala said...

JMFC, Just thought I'll give better shape to my question since your answer is indeed important for my understanding. I am repeating below the entire Mises Wiki on the Australian Banking Crisis of 1893. "The 1893 banking crisis occurred in Australia when several of the commercial banks of the colonies within Australia collapsed. During the 1880s there was a speculative boom in the Australian property market. Australian banks were operating in a free banking system, in addition to few legal restrictions on the operation of banks, there was no central bank and no government-provided deposit guarantees. The commercial banks lent heavily, but following the asset price collapse of 1888, companies that had borrowed money started to declare bankruptcy. The full banking crisis became apparent when the Federal Bank failed on 30 January 1893. By 17 May, 11 commercial banks had suspended trading." My main question is this - What caused the speculative boom of the 1880's? Could a massive inflow of British capital have caused it? Did it? If so, can we say that even though Australia was under free-banking, the Central Bank+FRB system of Great Britain created the speculative boom in Australia in the 1880's? I just hope you answer this because LK has been talking of the Australian Crisis of 1893 for quite some time as a refutation of ABCT. I would like to see someone of your knowledge and understanding answer this question.

Tel said...

With regards to 19th century Australian free banking, there's a number of critical points. Most significantly, Australia was a penal colony at the time and so a large percentage of the population were either prisoners or soldiers. Neither of these groups of people were exactly "free" to trade or go about their regular business -- the troops were under orders and the convicts were wearing chains. That said, convicts were allowed to own money and many of them did bring small amounts of money from England. When sentenced to transportation, their loved ones generally never expected to see them again, so they gave them what they could. The Bank of New South Wales was private, but a "private" incorporation in the 19th century had a bit of a difference meaning to what it does today. Governor Macquarie issued the charter of incorporation in the name of the British Crown (although it is arguable whether he had the authority to do so, he did have loyal troops on the ground), without assent and support of the governor there would have been no Bank of New South Wales. The BoNSW did issue paper money, which circulated successfully, but paper money was already circulating in many forms in the early colony including private promissory notes, paymaster notes issued as pay to troops and Commissariat store receipts (redeemable for goods at the central government store). In addition, new convicts who brought coins from England were strongly encouraged to deposit those coins into the BoNSW (such a deposit was in theory voluntary but was pushed by the government powers at the time, which were considerable when you were a prisoner). Beyond that, Governor Macquarie strongly disliked the trading of alcohol (rum in particular) as a local currency, and his support of the BoNSW was inspired by a morality drive and his own social engineering projects (which were not inconsiderable). When the gold rush came through, the BoNSW bought gold in exchange for paper notes, inflation was inevitable under these circumstances and of course there came a day when the gold stopped coming. Soon after the gold rush, Australia suffered strikes from workers who figured their goldrush-inflated wages should become permanent. 1893 was a bad year for banking in Australia, but 1890 had seen major maritime strike action, 1891 saw the big shearers strike and inevitably these events caused significant business losses, which cascaded into bank losses. Until there are no people, people will continue to invest in silly, unsustainable enterprises. Very true, and early Australia had a bunch of smaller private banks, many of which did go broke. However, the BoNSW was the largest and with the most support from central government, and it certainly did make a practice of issuing paper money without 100% reserve in any material commodity, right from the get-go. The BoNSW continues today under the name of Westpac and I believe it is still our biggest bank (or very close to it). I would argue that any economic system must deal with banks going broke from time to time, and support an orderly procedure for that.

Lord Keynes said...

Most significantly, Australia was a penal colony at the time and so a large percentage of the population were either prisoners or soldiers. At what time?? Certainly not in teh 1880s or 1890s. Your history of Australia is flawed: by the 1860s and 1870s 100 000s of free settlers had come to Australia, overwheling the convict population. All the states had long since ceased to be penal colonies: Transportation to the colony of New South Wales was finally officially abolished on 1 October 1850. Transportation to Tasmania ended in 1853 The last convicts to be transported to Australia arrived in Western Australia in 1868. http://en.wikipedia.org/wiki/Convicts_in_Australia When the gold rush came through, the BoNSW bought gold in exchange for paper notes, inflation was inevitable under these circumstances and of course there came a day when the gold stopped coming So asset bubbles can happen under a gold standard too? 1893 was a bad year for banking in Australia, but 1890 had seen major maritime strike action, 1891 saw the big shearers strike and inevitably these events caused significant business losses, which cascaded into bank losses. The cause of the depression of 1890s was a bursting asset bubble in property, bank runs, and debt deflation.

Bala said...

"The cause of the depression of 1890s was a bursting asset bubble in property, bank runs, and debt deflation" Incorrect. The proximate cause was a bursting asset bubble in property. That in turn caused bank runs and debt deflation. All this, however, does not answer a very fundamental question - Why did the asset bubble happen and then burst? I suspect you would say the gold rush caused it and then the cessation of the rush caused it to burst. That may be true, but that still does not answer the question completely. You still need to answer the question "What caused the gold rush?". A gold rush happens from place A to place B. It is not a "causeless" event that just happens. It is an effect of conscious human action. Gold rushes happen because of the peculiar set of conditions occurring in place A and place B. What were those peculiar conditions that occurred in Britain (the source) and Australia (the sink) at that time? Why did British capital move into Australia? This is especially important to understand if Australia did not have a Central Bank and had a relatively free-banking system (I am not yet accounting for the government intervention that Tel has spoken of). In that case, it becomes necessary to see the British and Australian economies together because it is possible that the Australian condition is an outcome of the action of British banks, Central Banks and Government. This, I suspect is part of what JMFC mentioned, not just what you replied with. That is just a small piece in the puzzle. So please explain the causes of the gold rush.

Lord Keynes never addresses what caused the initial gold rush, but it is admittedly a tough question.  I have dealt with Lord Keynes before, and though I enjoy reading opposing criticism, he (I am assuming he) does himself a disservice by only picking apart certain parts of people's arguments.  I really wish someone knew the reason behind the initial gold rush, but Bala and Tel should be praised for putting up such great arguments.  Read the whole comment thread here.  It is not just limited to the Australia Depression either, a lot of it deals with Fractional Reserve banking and how it works in a free market.  I think FRB can work in a free market as long as consumers know what they are getting into when depositing their money in a bank and agrees to let the bank do so with their funds.  This would have to be done by contractual law though.