Australian Economic History

Introduction

From the 1890s till the early 1990s, Australia dedicated most of its resources towards the formation of capital and the evolution of the country’s markets. At the time, the investments were a cause as much as a consequence of an economy that mostly relied on urban-based manufacturing and services. During this time, Australia did not have a well-developed saving culture within its population. On the other hand, it was burdened with a high external debt. However, the most surprising fact is that the process of capital formation in Australia was funded mostly by domestic savings. This survey discusses the financial and economic situation in Australia starting from 1890 till 1945. This period is crucial due to such events as World War I, World War II, and the recession of the 1930’s. This is a period that dictated the foundation of Australia’s capital market. It is crucial to perform an analysis and write a summary of Australia’s economic history so as to understand the measures taken by the financial stakeholders to ensure that Australia’s economy was in the position it is today.

Summary

In the late 19th century, the economy of Australia was mostly shaped by the needs of the borrowers, both governmental and private. Thus, these partied influenced the capital market formation and financial institutions of the time (Merrett 1997, p. 2). Moreover, the growth of the capital market since 1890 spanning over the next fifty years was mainly driven by the demands on the capital markets placed by the public sector. Previously, most of the borrowing was sought from overseas. The strengthening of Australian capital markets was prompted by two major events: World War I and World War II when the overseas capital markets were closed. The financing of the Australian government rose during this period. These two military conflicts led to a transformation of Australian capital markets. Moreover, the events led to changes in local capital markets, downgrading their role to issuing and trading government securities till the 1960s. The events that transpired during the wars further ensured that two government institutions, the Commonwealth Bank of Australia and the Loan Council, existed at the core of how capital markets operated.

Stock exchanges were first established in Australia to aid in the trading of mining shares. The mining industry required high levels of capital infusion during the exploration and development of new ore bodies. Such ventures were risky since the quality of the ore or the size of the vein was not known until after considerable sums of money were invested. However, the returns were also high if the ore was found and its quality was good. Mining shares were mostly speculative and more valuable than the industrial stocks as a result till the capital markets got stock after World War II.

Development of the stock market was developing slowly in the 1890s. The market issued shares, debentures, and bonds of private non-mining entities, such as banks, gas companies, breweries, shipping companies, etc. Many firms did not take advantage of this growing market and neglected the opportunity to receive equity from other members of the public. Most of the financing was raised by institutions through loans from banks or other creditors. At the time, the stock markets only traded small levels of industrial securities. Financial intermediaries performed most of the financial operations that the public required. The main business that they undertook was in mining scrip where they created no-liability mining companies.

The Australian economic depression that occurred in the 1890s was caused by two main issues: the distress of financial intermediaries and the bursting of the property market bubble. Trading banks and other companies were involved in the financing of property (Merrett 1997, p. 6). The properties owned by defaulters of loans appeared in the balance sheets of various financial institutions, leading to huge losses on the part of these organizations. The government was in charge of controlling the economic depression and several measures were developed though only one got the desired results. One of the measures implemented was liquidity. It did not bring forth result until a number of governments decided that reconstruction was the way to go. This happened after the Commercial Bank considered the action to be successful. Reconstruction worked as follows: all the depositors converted their deposits into debentures, while the shareholders added capital to financial institutions to ensure that it continued to operate.

Consequently, during this time, various state governments in Australia needed capital to resettle their population into rural areas and get involved in the various projects within the country. Previously, a considerable share of borrowing was conducted through the institutions based in London (Cain & Hopkins 2016, p. 258). However, after the 1890s depression, most of the financial institutions in London turned a blind eye to the borrowers in Australia. As such, the borrowers turned to the financial institutions located in Australia. This cycle of borrowing continued until 1910 when the expenditure by various governments exceeded the capacity of domestic banks. This happened because of the resettlement and large-scale construction projects. During the period between 1890 and 1910, local government authorities that needed capital to finance construction projects went to local stock markets to seek the capital they needed after London became unreceptive to Australian loan requests. Various state, local, and semi-government institutions sought the capital markets for their needs, bringing the sum of outstanding loans in the register of the domestic capital markets from £26 million in 1899 to £114 million in 1913 (Merrett 1997, p. 9). This issuance of securities and trade is what changed Australian capital markets and lay a basis through which local governments transformed after the First World War.

Additionally, the mining industry helped in the formation of Australian capital markets. The mining industry attracted various individuals, especially from London. The financing of the mines came from London, but the Australian-based stock markets were similarly involved. This ensured that the domestic stock exchanges were conducted and the capital was provided, strengthening the market even more.

The three decades during which both world wars happened were of great benefit to capital markets and Australian financial sectors. World War I ensured that the Australian government stopped focusing on developing the economy and focused on the raging war instead. During the war, various individuals received loans from domestic financial institutions. The loans or bank deposits were used to buy war bonds that were later traded in the stock exchange markets. The Commonwealth Bank of Australia was the one to manage and issue war loans. When the government turned to borrowing internationally after the war, the Loan Council was formed to facilitate all borrowings by the federal government. While the federal and state governments sought loans abroad, local and semi-government authorities as well as non-mining companies used local share markets to get capital. As a result, more companies participated in the stock exchange and listed their securities. Moreover, in cases when the government engaged in a series of conversion loans to manage debt, the brokers benefited from fees and commissions. This shakeup in Australia’s stock market saw foreign direct investments from the parties located in London. They joined the textile, confectionery, engineering, and chemical industries, while those from the United States joined the automobile, rubber, and food production industry. This rate of direct foreign investment accounted for a quarter of capital formation in Australia in the 1920’s.

The depression in 1931 led to a shakeup of global economy. The Commonwealth Bank and the Loan Council were the institutions that influenced policy-making within the industry. During the time, there was a disagreement on how to handle the depression. The ruling Labor Party had different views on the issue from those of the conservatives. The Loan Council and the Commonwealth Bank came to a conclusion that the government should reduce its borrowing and spending. This ensured that the Commonwealth Bank and the Loan Council were crucial players in Australia’s capital market.

Lastly, the Second World War resulted in a number of consequences as far as Australia’s capital markets are concerned. First, public and private capital formation were affected. The government reduced their non-war expenses and limited the level of private spending. Moreover, the continued military conflict led to the rundown of various industries and wage fixing. However, investment in military resources and road construction rose. Additionally, the government raised large loans within domestic capital markets. The proceeds from the sale of government securities to the public were once again managed by the Commonwealth Bank. As a result, the war loans sought by the government in the financial markets led to the democratization of the markets. The government securities continued to flow in the market, leading to a shift in how various governments sought capital. Additionally, the country was able to rectify its balance of payments through the sale of war materials and foodstuffs to allies. All this led to a change of behavior, meaning that the government relied upon domestic share markets to raise capital in the future.

Critical Review

The article by D. T. Merrett seeks to answer crucial questions regarding the formation of capital markets and capital formation in Australia between 1890 and 1945. The article describes the events that occurred within the said years that helped to shape the Australian capital market. Most of the paper revolves around the influence that financial institutions had as far as capital markets are concerned. Furthermore, it focused on government borrowing attitudes that had a huge impact on the foundation of the capital market in Australia. The author seeks to use the available information to provide knowledge to individuals without much knowledge of the field. This becomes evident when the author provides an abstract followed by an introduction that discusses the role of the survey and mentions information on the state of Australia in terms of capital, financial institutions, and capital markets prior to 1890. The information provided sets a basis  which allows the readers to understand the rest of the article. The author seeks to address the individuals seeking to understand the foundation of Australia’s capital markets. Thus, the article can be classified as an informative article; this kind of writing does not seek to answer all the questions regarding certain issues. Instead, it reviews different forms of literature to describe the roles individuals and institutions played in terms of the formation of a stock market in Australia. This research is significant because it shows some of the events that contributed to a strong stock market in Australia, such as Australia’s economic depression of 1890, the First and Second World Wars, and the Great Depression of 1930.

The author uses both the qualitative and quantitative models in the survey to explain why the capital markets in Australia exist in the form they do and how individuals at the time raised their capital. A qualitative research is mainly used to analyze underlying theories, their motivations, or the underlying opinions (Sarantakos 2012, p. 47). Qualitative research is used to define or clarify the nature of certain situations. Quantitative research provides numerical data to support the presented information (Wisdom et al. 2012, p. 725). Accordingly, data is important in any form of quantitative research (Carbaugh & Buzzanell 2009, p. 106). In the first case, the author shows the conditions that led to the formation of modern capital market. Furthermore, the author uses data to show how capital was influenced by various events or loans taken by the government. Consequently, the use of both models of research helps achieve the purpose of aiding the audience in understanding capital markets and capital formation in Australia.

The article adopts a narrative approach. According to Byrne (2016, p. 1), narrative articles have a broader scope as opposed to systematic reviews. However, they raise questions regarding the lack of rigor and synthesis. The survey under discussion lacks the model essential to many articles that includes an introduction, methods, analysis, discussion, and conclusion. Each of these sections is crucial since it provides information that validates the main argument that an author seeks to present to their audience. In this article, the author fails to provide such clear division, making it difficult for the audience to follow. This lack of strict arrangement of facts and evidence can lead tosuch an article becoming unreadable (Walker 2011, p. 18). Instead, the author divides the article into three main sections: the introduction, depression and recovery, and World Wars I and II. Considering the length of the paper, the author should have developed other sections that would have ensured the coherence of the entire paper, presenting his thoughts to the audience in the best way possible.

The author argues that the continued handling of a sufficient volume of domestic deposits is what led to the concentration of capital in Australia and the development of the capital market. The author presents balanced arguments throughout the paper. A balanced argument considers both the merits and demerits of one’s position (Mahanand 2013, p. 192). Thus, a balanced argument means that the author should discuss all the points and analyzs all the events that affected capital and capital markets formation between 1890 and 1945. Several factors that affected the formation of capital and capital markets are mentioned, such as borrowing money from London, the liquidation of financial institutions after the burst of the properties industry bubble, etc. Additionally, the author outlines the situations that led to the capital and capital markets formation, including foreign direct investments after the First World War, the government’s investment in the form of  securities sale, the reconstruction of financial markets, etc.

The author uses a number of strategies to prove his point. One of the strategies is the use of dates. Dates provide a timeline that an individual can follow throughout the paper. The author takes advantage of various timelines and events to explain what happened and how some of the events either led to the deterioration or improvement of the situation. A good example of this is the depression in 1890. This event led to increased borrowing on the part of the government from institutions based in London, thus leading to the deterioration of domestic markets. However, during the same period, the sudden interest in mining gold provided the stock market and capital formation a chance to grow due to the nature of business. Mining was risky, so capital could only be availed through opening companies and enlisting them in the securities markets. Another crucial episode happened in 1910 when financial institutions in London refused to provide loans to the state and federal governments. As a result, the government sought capital from the stock market.

Logos is another strategy utilized by the author. The author uses logos to show how the actions of the government and the financial institutions led to the concentration of capital and the formation of stock markets. Writers use logos when they try to appeal to their audience by utilizing logic in their work (Shabo 2010, p. 8). For example, the author discusses how during the Great Depression, most companies forewent raising internal financing and sought funds by participating in the stock exchange instead. Evidently, the more companies enlisted, the more business was conducted in the stock exchange. This led to the consolidation of the stock market. On the other hand, enlisting the companies in stock exchange ensured that the institutions got the funding that they needed to either expand or continue engaging in business. This appeal to logos means that individuals reading the article should be able to make the same deduction as the author.

One area that the study falls behind in is the use and analysis of data. Data is crucial in articles since it provides factual figures that reinforce various ideas (Humphrey & Lee 2008, p. 227). In this article, data is necessary to show how the stock market developed or how the levels of capital borrowed by the government changed. However, the author does not provide enough data in certain instances. For example, he discusses how there was a change in the balance of payments during the Second World War. The data needed to show the negative balance of payments that Australia experienced previously was not provided. Moreover, the data on the shift from a negative to a positive balance of payments is not provided either. Therefore, there is no proof that the balance of payments actually shifted to favor Australia. Additionally, during the same period, the government sold its securities in the stock market. The Commonwealth Bank was tasked with dealing with the money collected. The author does not provide the actual number of loans placed by the government in the stock markets as securities, but instead describes them as ‘very large loans’. No figure for the loans is provided. Such data could have been crucial in assessing the number of securities that the government put on the market and whether these loans in the securities exchange market had a significant effect on ensuring that the capital market became what it is today.

In conclusion, the author seeks to discuss the formation of stock markets and capital between 1890 and 1945 in Australia. The stock market formation in Australia was a process that involved several stakeholders. Throughout the text, the author continues to provide unbiased opinions of why the capital market reached its modern form. Several reasons are provided to support the strengthening of capital markets in Australia. The first involves the trading of government securities. By trading government securities during a period when the government did not receive loans from London, the stock market found an activity that led to the creation of its foundation. Moreover, different companies were able to participate in the stock market and trade their shares through various forms of direct foreign investments. Consequently, they received funding from the public. This led to the formation of the modern version of Australian stock market.