From: Stephen Williamson
Sent: Wednesday, December 18, 2013 4:22 PM
Subject: How did everyone in Australia really survive before banks?
And secondly since 1788, virtually no depositor into a savings bank in Australia who then stayed in Australia has ever lost his or her money. How come?
Because banks do not "create" wealth, they can only facilitate it, remove it, or become insolvent, click here for more on how banks become insolvent. In Australia, the Federal Government currently insures and thus guarantees personal deposits, up to $AU 250,000 per customer per institution.
Looking at the first question, first it was the grand old days of "promissory" / "small change" exchange notes used for bartering — all having a "face" value and a "buying" value. 100 businesses apparently got started up this way in Sydney and Hobart. Yes, the imagination boggles at what they promised soldiers, administrators and free settlers, both legally and illegally. And with a major shortage of silver coins, rum became the colony's "money", more by necessity than choice.
A brief background: With the departure of Captain Phillip at the end of his tenure as governor in 1792, the infant colony was briefly left in the care of lieutenant-governors who governed on behalf of the New South Wales Army Corps. Importantly, members of this military force had the ability to raise capital — labour and materials — by borrowing against their regimental pay, which was accumulating back home in England.
At the time, John Palmer was the official commissary in Sydney, empowered to draw bills of exchange on the British Treasury countersigned by the governor. He kept the public accounts and funds of the colony and was at once official supplier, contractor and banker to the settlement.
In 1793 the American trading ship, the 'Hope', arrived with 7,500 gallons of rum in her cargo. The other goods she carried were desperately needed but the Hope's captain insisted that he would sell nothing to the colonists unless they also bought all of his rum. The New South Wales Corps officers accordingly formed a syndicate with regimental paymaster John MacArthur fixing the necessary IOUs against the regiment's funds in England, bought this cargo, then distributed it at a sizeable profit. The vast pool of rum flooded into the market place at grossly inflated prices and at once became a means of exchange. For their efforts, the New South Wales Corps were immediately dubbed the 'Rum Corps', a name which stuck until their recall to England in 1810. The rich pickings they made from that first deal gave them the power to monopolise almost all trade, particularly that in rum (the name given to all spirits), for those 17 years.
In 1805 MacArthur, having resigned his commission, was appointed 5,000 acres at Camden Park by the Privy Council in London for his growing herds of Merino sheep, and run from Elizabeth Farm near Parramatta, his original acreage that he had named after his wife.
Click here for further background to John MacArthur, his trips to England, and an account of the coup against Governor Bligh in 1808 which led to MacArthur's son going to London accompanied by the first bale of exported wool.
Click here for a history of Australia Post, with Isaac Nichols appointed the first postmaster in 1809. Having one man in charge alleviated the mayhem that at times occurred when supply ships arrived, which was said to include unscrupulous people taking other people's mail and selling it back to them. Nichols worked from his house, also substantial buildings he had built in lower George St then known as High Street from where he had also established a shipyard. The cost to a recipient for the service he provided was one shilling i.e. about $65 today.
Incidentally, this principle of "having the recipient pay" is still practised by Australia Post with letters or parcels where there is no (or under) paid postage. If there is no return address listed on the back, their "stated" policy is to leave a card for the addressee advising of a postal article awaiting with more to pay on it. Then, if still unclaimed and if there is no return address inside, after a length of time — between three and 12 months depending on the value of any goods inside — any goods are auctioned off for charity.
In 1810 Governor Macquarie arrived with a new army regiment, followed, in November 1812, by a shipment of £10,000 value in Spanish dollars (i.e. $40,000 in Spanish coins) for the colony's use. Now, starting in 1817, came the first banks, working initially with these Spanish dollars. MacArthur returned that same year, with his exported wool soon making him the "richest man" in NSW. In January 1826 English currency became Australia's official currency, using silver and copper coins issued to the colony from the London mint. Within 10 years all other coins disappeared from circulation.
Note, after Federation in 1901, these British coins continued in Australia, being minted in London. In 1910 came the first Australian silver coins (threepences, sixpences, shillings and florins), then in 1911 Australian copper pennies which were also minted overseas.
Not until after WW1 started did Australia's first silver coin minting begin, at the Melbourne mint, in 1916. The Canberra Mint was opened in 1965, in preparation for Australia's decimal coinage.
Back to 1817. Australian banks were now divided into two distinct categories — savings banks and trading banks. Savings banks paid virtually no interest to their depositors, their lending activities were restricted to providing mortgages, and ended up guaranteed or owned by the colonial governments, using post offices as front counter agencies. Safer for borrowers and depositors. Trading banks on the other hand were private banks, essentially merchant banks, which provided no services to the general public, but were underwriters for farmers, miners, builders, etc. They printed private banknotes / future-dated promissory notes, based on their paid-up capital — starting with that Bank of NSW in 1817. But most of these trading institutions closed their doors — specifically through depressions in the 1840s and in the 1890s — as businesses that partnered with them failed, with inadequate insurance. And then there were the standover merchants, not to mention bushrangers. It was a tough land. Ouch.
But with savings banks, even when fraud occurred, losses were borne via colonial government regulation only by shareholders & overseas depositors / banknote holders. Rarely, if ever, by Australian depositors / banknote holders. While runs on savings banks certainly occurred, it meant a corresponding "domino" effect was short-lived. For example, in one of the first runs in 1843 on the Savings Bank of NSW (no relation to the Bank of NSW), the colonial government undertook to guarantee trustees' borrowings, if taken out to meet the bank's repayments, of up to £50 000. This action followed the crash, and loss to many wealthy ones, of an early merchant bank known as the
Click here for further background.
Of course, the gold rush in 1851 helped — some people . A Sydney mint opened in 1855, issuing gold coins, followed by the Melbourne mint in 1872, then Perth in 1899.
In 1893, the year of the great Brisbane flood and with many banks failing, the Queensland Treasury issued their own legal tender banknotes, via Queensland Government bonds, and prohibited private banks in the colony from issuing their own notes. These, instead, replaced the private banknotes of the eight trading banks whose doors had not closed.
Click here to read about the political situation, with missionaries from London requesting Queensland's protection to New Guinea in the immediate north.
But, back to banking, they were the first colonial government to do that on a major scale since, perhaps, the days of that regimental paymaster John MacArthur in 1793 with those IOUs. And, as intended, it helped restore confidence and brought people and investment — to Brisbane (and Queensland).
Queensland had another "first" 84 years later when it
But to double its income from sales taxes (it was still very young), the Qld government now introduced a wide-ranging Income Tax Act in 1902, click here for more details. To summarize, the levy was 10 shillings per annum on every adult male over the age of 21 earning less then £100, £1 per annum if earning between £100 and £150, then 5% on "produce of property" income and 2½% on "personal exertion" income for income over £150. Note, adult females weren't taxed unless their income exceeded £150. Click here for income taxing in the other states. For further background on Australia's tax history, click here.
Back to the banks. In 1910 came Australian Treasury banknotes printed in Melbourne by a subsidiary company,
In 1915, two years later during World War 1, Australia followed the United Kingdom in prohibiting all gold exports except with the Treasurer's consent. This restriction was only temporarily removed in 1925.
In 1920 the Commonwealth Bank became Australia's Central Bank, and taking over responsibility for note printing from the Commonwealth Treasury. It became a Clearing House between the Big Four Banks (1. Bank of NSW (today Westpac), 2. National Bank, 3. ANZ and 4. Itself) and when required a Lender of Last Resort.
In 1929, the Commonwealth Bank Act provided for the requisitioning of all Australian gold in return for Australian notes. Formal action was never taken under this legislation, but it marked the beginning of the end of the holding of gold by banks and the public in Australia. The Bank did make gold available to meet domestic industrial demand, but exports were strictly controlled.
In June 1932, the Commonwealth Bank Act was amended to allow part of the note reserve to be held in UK pounds sterling, with £G10 million of gold shipped overseas from the gold reserve of the Australian Notes Fund.
The outbreak of World War II again called for special Commonwealth gold controls. In 1939 regulations under the Defence Act provided for the acquisition by the Commonwealth Bank of newly won and other gold. After the war these controls were continued in the Banking Act, until they were lifted in 1976.
In 1960, the Reserve Bank of Australia became Australia's Central Bank in the place of the Commonwealth Bank, with each member bank holding Exchange Settlement Accounts. Smaller banks and building societies and credit unions though still had no direct access and could only provide customers with agency cheques via an arrangement with a major bank.
In 1983, the Australian government "floated" the Australian dollar, meaning that it no longer fixes its value by reference to the English pound, the US dollar or any other foreign currency. In 1985 there was massive deregulation. That year sixteen foreign banks gained access to the system, followed by many more. In early 1997, the Reserve Bank increased its holding of overseas currencies, selling 167 tonnes of gold and exchanging it for $US, and later on € euro, and others.
It has enabled it to intervene, e.g. during the global financial crisis, to restore market liquidity and limit excessive price volatility.
The last bank failure in which Australian depositors lost money (and then only a minimal amount) was that of a trading bank, the Primary Producers Bank of Australia, back in 1931. Since then until today, banks have wound up but, banking sector problems have been resolved, without losses to depositors. As mentioned earlier, the Federal Government currently insures and thus guarantees deposits (up to $250,000) per customer, per institution, click here.
Yes, we are such a young country, hard to understand other countries' situations, and so hard for other countries to understand us. And isn't it amazing at how the Lord has undertaken, so often, during those past 224 years.
Click here for further background of how deposit slips and promissory notes evolved into privately backed banknotes and government backed "legal tender" banknotes, and how the bill of exchange turned into a modern cheque.
Click here for some photos of Australia's early pre-decimal banknotes and coins.