golden fleece?

This page considers Australian precedents for the telco and dot-com bubbles, including the 1890s land boom, 1960s mineral boom and 1980s exuberance.

It covers -

• introduction - the shape of booms and busts in Australia
• the roaring nineties - property speculation, financial malpractice and regulatory weakness in the greatest of all Australian bubbles?
• minerals and manias - conglomerates, resources and collapses in the 1960s and 1970s
• white shoes and sailboats - Bond, Skase and peers during the 1980s
• studies

     introduction

Australia's history has been punctuated by financial booms and crashes that have overlain - and sometimes accentuated - deeper economic developments within growth of the national and global economies.

It has been claimed that the Australian colonies and nation have been peculiarly susceptible to excess (or merely slow to recover), for reasons variously attributed to the shallowness/immaturity of domestic capital markets, small population size and export orientation, or even a weakness for gambling - exposure to the Southern Cross apparently inducing a compulsion for a flutter on the nags, pokies or penny dreadfuls.

As other pages of this profile suggest, booms and busts are not particular to Australia, although geography, regulation and markets mean that irrational exuberance has taken particular forms.

Geography precluded pre-railway speculative investment in canal building, so there was no Australian equivalent of the canal giddiness evident in Britain, New England and France. (Spending from the 1920s through 1980s on irrigation in the Riverina and Ord region was environmentally disastrous and financially unjustified but did not damage the overall economy).

Government ownership of railways and the telegraph network - unsurprising given the early social compact and the shape of colonisation - meant that Australia did not experience the recurrent rail and telegraph bubbles evident in Europe and the US, although as with regions .

The 1890s financial crash, exacerbated by prolonged drought, arguably had a greater impact on economic growth than similar crises in the northern hemisphere. Seventy years later Australia's bubble centred on extractive industries, in contrast to electronics and services speculation in the US at that time.

The local dotcom bubble was less spectacular and later than the US counterpart, reflecting both the scale and shape of the Australian economy (fewer opportunities, a tradition of investment in residential property rather than innovation).

     the roaring nineties

Arguably the definitive bubble in Australian history occurred during the 1890s, following several decades of economic and population growth fuelled by government investment in infrastructure, intensified agricultural development after early settlement and the emergence of a substantial domestic manufacturing base funded by local and UK capital. Aggregate overseas investment, primarily from the UK, in the four major colonies from 1876 to 1880 was around £33.6 million. That climbed to £70 million from 1881 to 1885; from 1886 to 1890 it was £100 million (of which over 50% went to Victoria).

Problems were most apparent in 'Marvellous Melbourne' - the Brisbane of the 1880s - where speculation in property development and land purchases saw a slowing of real estate sales in late 1880s and difficulties for an unusual number of builders, estate agents and builders. Bursting of the bubble in 1891 saw the collapse of building societies and mortgage banks. That was exacerbated by weaknesses in corporate governance (in particular inadequate disclosure and ineffective restrictions on insider dealings by company executives and directors). Urban property values sank by over 64% in four years.

It was also exacerbated by systemic weaknesses in agricultural lending, with the collapse of pastoralists and farmers during a lengthy drought (and amid slumping commodity prices attributable to new technologies and international competition at the height of pre-1914 globalisation) demonstrating that local and overseas financiers had lent unwisely.

Those problems had overseas counterparts: the spectacular collapse of UK promoter Jabez Balfour (1843-1916) in 1892 for example involved £7 million - the equivalent of several billion dollars in today's values. However, along with a withdrawal of funds from overseas and reconstruction of local savings and trading banks they resulted in a general crisis of confidence.

Asa Briggs problematically claimed that the crisis affected Melbourne's 'personality', so that from being the Empire's most 'American' city it became its most 'British'. That assertion is difficult to sustain when Melbourne is compared with, for example, Christchurch. However it may have fuelled both Australian interest in 'gas & water socialism' and in federation.

One clear effect of the crash was a reform of corporate governance, with the Victorian Companies Act 1896 for example preceding the UK Companies Act 1928 and US corporate law reform in 1934.

     minerals and manias

Australia recovered in coming decades because of

• global demand for agricultural and other commodities
• strengthening of its overall economic base through investment in infrastructure, education and industry
• the 'rule of law' and social compact

It thus did not experience the pervasive inequalities and corruption that eroded the performance of peers in South America - resource-rich, able to take advantage of demand from the northern hemisphere during the post-war years but progressively falling behind in GDP rankings.

A counterpart to the US 'transistor' boom was found in the 1960s, with speculative commercial property development, consumer finance innovations and expansion by retailers of whitegoods. The Korman property group was a prominent casualty when interest rates were raised, with the demise of Reid Murray, Stanhill and HG Palmer.

A decade later wild speculation in resource stocks - illustrated by increase in shares of Poseidon from $1.85 in September 1969 to $280 on 10 January 1970 - centred on claims about mining companies that had never commercially extracted nickel or other metals (and in some cases never did). Soaring values were attributable to puffery, upbeat reporting and crowd behaviour.

The grotesquely over-geared resources conglomerate Mineral Securities Ltd (Minsec) went on a wild ride from 1965 before collapsing later in 1970 after becoming one of the largest share traders in Australia's history.

     white shoes and sailboats

A decade later exuberance in corporate lending, borrowing and asset shuffling - again accompanied by regulatory weakness and uncritical coverage by the media, academics and professional bodies - saw the demise of leading enterprises, consolidation of local institutions and pain for overseas lenders such as HSBC and Standard Chartered Bank.

It has been estimated that aggregate write-offs by major financiers were over $34 billion, with an undetermined cost to small investors (some of whom unwisely sunk substantial money in disasters such as Bond group and Adsteam or lost opportunities as the big end of town regrouped).

Relaxation of monetary policy after the 1987 crash in Australian and overseas share markets (the ASX index dropped 25% on October 20, with an overall decline of 50% by 11 November) saw continuation of speculative excess in 'entrepreneurial' industrial stocks and in the commercial property market before collapses cascaded through the economy.

Those collapses were driven by tightening of loans from overseas financiers to major conglomerates, questioning of claimed values and closer scrutiny by the media and government agencies of dealings by business figures such as Alan Bond and Christopher Skase. Takeovers by those figures had failed to result in tangible efficiencies or investment in innovation and market development, contrary to hype from business schools and the business press that a new generation of executives would replace complacent managers and make best use of sleepy assets.

Restructuring of leading businesses included -

• Adelaide Steamship - the nation's largest industrial conglomerate, with interests from tugboats to wineries
• all major commercial television networks - Nine (Bond), Seven (Skase) and Ten
• Fairfax - the second largest newspaper group
• Bond Brewing - with roughly half the market
• Bond Corporation - property and diverse industrial holdings in Australia and overseas
• State Bank of South Australia
• Equiticorp - finance, property and industrial conglomerate with interests in Australia and New Zealand
• State Bank of Victoria - rescued by the Commonwealth Bank after meltdown of its Tricontinental merchant banking arm
• Pyramid - Victoria's largest building society
• Budget - largest car rental company
• Linter - the largest textile group
• Elders - brewery, agribusiness and finance conglomerate
• Partnership Pacific - merchant bank rescued by parent Westpac

with 'near-death experiences' for over-extended groups such as News Corporation.

The near collapse of two of Australia's four state banks was reflected in Royal Commissions that damned managers, governments and the financial watchdogs (albeit to little effect, judging by misbehaviour in the insurance sector a decade later).

Bond Corporation had announced a record $980 million loss (with overall debt of $US10 billion on sales of around $9.5 billion) before going into receivership. Alan Bond was declared bankrupt in 1992, paying his personal creditors $3.25 million to settle debts of over $500 million.

     studies

As a starting point we recommend John Simon's 2003 Reserve Bank conference paper Three Australian Asset-price Bubbles (PDF).

An introduction to Australian financial hysteria, up and down, and creative accounting is provided by Trevor Sykes in Two Centuries of Panic (North Sydney: Allen & Unwin 1988), The Money Miners: Australia's Mining Boom 1969-70 (Sydney: Wildcat Press 1978) and The Bold Riders: Behind Australia's Corporate Collapses (North Sydney: Allen & Unwin 1994).

They can be supplemented by Stephen Bell's Australia's Money Mandarins: the reserve bank and the politics of money (Cambridge: Cambridge Uni Press 1994), The Australian Economy in the Long Run (Cambridge: Cambridge Uni Press 1987) edited by Rodney Maddock & Ian McLean and Australia in the Global Economy (Cambridge: Cambridge Uni Press 2000) by David Meredith and Barrie Dyster.

There is a more episodic but often revealing treatment in Australian Financiers (South Melbourne: Macmillan 1988), edited by Boris Schedvin & Reginald Appleyard, and in the profiles of particular protagonists - such as the Baillieus and Stanley Korman - within the Australian Dictionary of Biography.

For the 'Argentine Mirror' see A New Economic History of Argentina (Cambridge: Cambridge Uni Press 2003) edited by Gerardo della Paolera & Alan Taylor and Argentina and Australia: Essays in Comparative Economic Development (Clayton: Economic History Society of Australia & New Zealand 1985) edited by AE Dingle & David Merrett. A contemporary perspective on resource bubbles is provided in Richard Leaver's 2005 Australia and Asia-Pacific energy security: the rhymes of History (PDF).

The 1890s debacle has attracted increasing attention, whether for innate interest, the effect on the national psyche, impact on urban architecture or as a driver of federation and nasties such as the White Australia Policy.

The most lucid introductions remain Michael Cannon's The Land Boomers (Carlton: Melbourne Uni Press 1966), Graeme Davison's The Rise and Fall of Marvellous Melbourne (1978) and Geoffrey Searle's The Rush to be Rich: A History of the Colony of Victoria (Melbourne: Melbourne Uni Press 1971). Noel Butlin's Investment in Australian Economic Development, 1861-1900 (Cambridge: Cambridge Uni Press 1964), Ernest Boehm's Prosperity and Depression in Australia, 1887-1897 (Oxford: Clarendon Press 1971), Barry Eichengreen's Capital Flows and Crises (Cambridge: MIT Press 2003), Evolving Capital Markets and International Capital Flows: Britain, the Americas & Australia, 1865-1914 (Cambridge: Cambridge Uni Press 2001) by Lance Davis & Robert Gallman and John Weaver's 2005 paper A Pathology of Insolvents: Melbourne 1871-1915 are of particular value. For Balfour see Jabez: The Rise & Fall of a Victorian Rogue (New York: Atlantic 2004) by David McKie.

For the 1980s boom and bust see in particular Paul Barry's lucid Going For Broke: How Bond Got Away With It (Sydney: Bantam 2000) - updating the story in The Rise & Fall of Alan Bond (Sydney: Bantam 1991) - and Corporate Collapse: Accounting, Regulatory & Ethical Failure (Cambridge: Cambridge Uni Press 2003) by Frank Clarke, Graeme Dean & Kyle Oliver.

Giddiness in the banking sector is highlighted in Tricontinental: The Rise & Fall of a Merchant Bank (Carlton: Melbourne Uni Press 1995) by Hugo Armstrong & Dick Gross and in Edna Carew's Westpac: The Bank that Broke the Bank (Sydney: Doubleday 1997). For property adventures in Queensland see Samurai in the Surf: The Arrival of the Japanese on the Gold Coast in the 1980s (Canberra: Pandanus Books 2005) by Joe Hadju.

Henry Bosch's The Workings of A Watchdog (Port Melbourne: Heinemann 1990), Corporate Collapse: Accounting Regulatory and Ethical Failure (Cambridge: Cambridge Uni Press 2003) by Frank Clarke, Graeme Dean & Kyle Oliver, Of Manners Gentle: Enforcement Strategies of Australian Business Regulatory Agencies (Melbourne: Oxford Uni Press 1986) by Peter Grabosky & John Braithwaite and The Big End of Town: Big Business and Corporate Leadership in Twentieth-Century Australia (Cambridge: Cambridge Uni Press 2004) by Grant Fleming, David Merrett & Simon Ville and Anne Lampe's Media Coverage of Complex Commercial Fraud paper offer insights into contemporary regulatory failures.

As discussed later in this profile, there has so far been no major study of the dotcom bubble in Australia and New Zealand. Most writing has been evanescent or has centred on particular enterprises, such as Paul Barry's crisp account in Rich Kids (Sydney: Bantam 2002) of the OneTel debacle.





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