|
|
Googling for background on the Banking Act for a future blog, I found a paper
titled "A History of Last-Resort Lending and Other Support for Troubled
Financial Institutions in Australia" (http://www.rba.gov.au/rdp/RDP2001-07.pdf).
I had an unnerving déjà vu experience when reading Section 10
(except the bank run part, maybe that is next). Below are some extracts.
"Section 10 The
1970s
Following the
comparative calm of the 1950s and 1960s, the growth of non-bank financial
institutions fuelled a property boom in the early 1970s. The 1974 liquidity
squeeze brought the boom to an abrupt end. The failure of a number of
property financiers precipitated runs on building societies in several
states, particularly South Australia and Queensland. Building societies in
Queensland also experienced difficulties in 1976 and 1977. Weakness in the
property market brought down the Bank of Adelaide later in the decade. The
Reserve Bank provided some liquidity support in each of these cases, although
it did not lend directly to non-banks.
10.1 The 1974 Liquidity
Squeeze
Following a boom in
lending by banks and non-bank financial institutions, the Reserve Bank
tightened monetary policy in 1973. This was accompanied by a drain in
liquidity resulting from a deterioration of the balance of payments and a
government budget surplus. As interest rates soared, property prices began to
collapse triggering the failure of several property development companies.
On 30 September 1974,
the property financier Cambridge Credit went into liquidation. The failure of
two other substantial property developers (Home Units Australia in July and
Mainline Corporation in August) preceded Cambridge Credit’s closure.
While those failures prompted sharp falls in the share prices of other
property developers, finance companies and banks, Cambridge Credit’s
failure saw public nervousness spread directly to other financial
intermediaries. The following day, runs developed on building societies in NSW,
Victoria, Queensland and South Australia. While the runs in NSW and Victoria
were comparatively small, the runs in Queensland and South Australia were far
more severe.
...
Although the Hindmarsh Building Society in South Australia was
financially sound, it was subject to the most severe run. The run, based on rumours the society had lent to failed property
companies, continued, little affected by the Acting Treasurer’s
statement. The run exhausted the society’s cash reserves. The National
Australia Bank lent the society cash until the National also ran low. On 3
October, the South Australian Premier, Don Dunstan, addressed customers
queuing outside the Hindmarsh’s offices,
assuring them that their funds were safe. The run subsided the next
day."
For "youngsters" like me (I was only 5 years old when this
liquidity squeeze occurred) I would also recommend reading "Appendix A:
Financial Disturbances in Australia – A Chronology". Runs happen.
Interesting question is whether the public these days would be comforted by a
statement by a politician that all is OK. Maybe they will be, is there any
proof that society has gotten any smarter? If anything one could argue they
have gotten stupider and more greedy and are just as invested in keeping the
system going so will want to believe there isn't any fundamental problem with
the system. Coming soon to a theater near you: The F-Files: I Want to Believe
in Fiat Currencies.
I also found some other interesting comments about legal tender gold backed
notes in the paper:
“High-powered
money consists of those forms of money that are directly exchangeable for
real goods (i.e. commodity money, such as gold coin, and instruments declared
to be legal tender). While, up until 1910 the notes issued by banks and
backed by gold were also highly liquid, the fact that their widespread
acceptance relied on public confidence in the banks that issued those notes
indicated that they were one step removed from high-powered money.”
“In 1910, the
Federal Government’s legal-tender note issue was introduced. Initially,
it was required that the government’s gold reserve cover one-quarter of
the value of notes issued up to £7 million. For any note issuance above
£7 million, one-for-one backing was required. In 1914, however, the
gold reserve provision was relaxed so that the required gold reserve was
one-quarter of the value of notes on issue regardless of the size of the
total note issue.”
“The bank
[Commonwealth Bank] was required to maintain a minimum gold reserve of 25 per
cent of the notes on issue (although the required gold reserve was reduced to
15 per cent in June 1931). Although Australia went off the gold standard at
the end of 1929, it was not until the introduction of new banking legislation
in 1945 that the gold reserve requirement was completely abandoned.”
I like the term "high-powered money". I wonder if this is some
defined academic term or just made up by the authors? History lesson for
today - get hold of some high-powered money!
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration
Officer in their Sydney retail outlet. In 1998 he moved to Perth to work in
the then fledgling Depository division. He has held a number of roles since then
in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.
|
|
