Thursday, September 15, 2011

The Queensland financial crisis of 1866

From separation in 1859, successive Queensland governments had been spending beyond their means. The revenues received by them were insufficient to pay for their policies of development, especially the huge sums needed to build railways. In 1862, the Herbert government had negotiated a local loan of £123,800 at six per cent, followed by a further loan of £707,500 in 1863.[1]  In 1864, parliament had been forced to approve an additional loan of over £1 million in order to finance its expenditure, and had requested that the Union Bank of Australia place the debentures. However, the bank was only able to place £300,000 worth by the end of 1865.[2]

The Macalister government, which replaced Herbert’s government in February 1866, therefore inherited a situation where a £1 million loan, negotiated by the previous government with the Union Bank and handled in London, had failed. Even worse, the bank had made substantial advances to the government against the dubious security of these unsold bonds.[3]  A further £250,000 worth of bonds were sold in early 1866 at a discount of five per cent on the original price, adding to the government’s financial problems.[4]  The treasurer, Joshua Peter Bell, attempted to rein in new expenditure and considered increased taxation measures. [5]  However, the government felt that it had no option but to continue its program of public works because it provided employment for many recent migrants.[6]  Therefore, and in spite of its failure to place all the 1864 debentures, in May 1866 a new loan of £1,170,950 was authorised by the government.[7]  Although John Douglas - who was by then Postmaster-General - had reservations about this additional debt, he supported it as a “matter of actual necessity.”[8]

With the government already indebted to the Union Bank for nearly £500,000, advanced against the unsold debentures of 1864, the bank now refused any further advances against similar security. The government, in need of ready cash, eagerly accepted an offer from the Sydney agents of the Agra and Masterman’s Bank to place a loan on its behalf in London. Accordingly, debentures worth £500,000 were sent to Sydney for transmission to London, whereupon the Union Bank relented and agreed to advance another £100,000.[9]
Events soon took a turn for the worse when the Agra and Masterman’s Bank became involved in the failure of the British firm Overend, Gurney and Co, before the Queensland debentures had been placed.[10] The news reached Brisbane on 10 July 1866 and the government was informed that arrangements concerning the new loan and temporary assistance could not be carried out.[11]  The Union Bank then treated its arrangement to advance £100,000 as cancelled[12] and disallowed government cheques presented for payment.[13]
Macalister and his treasurer reacted to this sudden and dramatic crisis by announcing that, as credit could not be procured from other banks, the government would issue unsecured government notes.[14] This caused consternation in Brisbane business circles and amongst squatters who feared it would give “countenance to the economic fallacy that any government can make money to an indefinable amount with the aid of the printing press”[15] and generate rampant inflation.[16]  Governor Bowen announced that he would disallow any legislation sanctioning unsecured notes.[17] Adding to the crisis, the Bank of Queensland, established only three years earlier, also collapsed.[18]
Macalister took an uncompromising stand on this issue, and as Bowen also refused to give way, the government, including John Douglas, resigned on 17 July 1866.[19] Bowen, however, refused to accept the resignations, declaring he had not intended to dictate to the ministry and reserved any expression of his opinion on the proposed unsecured government notes until the proposed bill came before him.[20] The ministry therefore withdrew their resignations, but shortly afterwards Macalister received another communication from Bowen accusing him of financial mismanagement and attempting to dictate to him.”
This prompted a second resignation by Macalister on the evening of 18 July,[21] which was accepted by Bowen who then called on Herbert, who had not yet departed for England, to form a government again.[22]
Although Macalister’s government had resigned, the crisis remained. While Herbert immediately appointed a commission to resolve the government’s fiscal crisis,[23] because members of the ministry were gazetted members of the executive council, their resignations meant they would be unable to pass through both houses of parliament the necessary bills to resolve the crisis. To overcome the problem the resignation of the Macalister ministry was not gazetted (despite it having already been accepted) until the required bills were passed. Only then were the resignations of the old ministry and the composition of the new one gazetted.[24]
A Bill providing for the issue of treasury bills to the value of £300,000 at 10 per cent interest was passed “in double quick time” through both houses on 20 July, but not before 12 Macalister supporters left in protest over members of the proposed Herbert ministry sitting in the chamber before seeking re-election.[25] Herbert’s announcement that he and George Raff were assisting the governor in managing public affairs until the formation of a new government:
excited the deepest indignation of many members of the house, who deprecated the carrying out of business by irresponsible advisers.[26]

Douglas was one of those expressing their indignation. Unable to sanction what he believed were “unconstitutional acts,” he opposed the suspension of standing orders necessary to allow the passage of the Treasury Bills Bill in one day.[27]  This was a deeply divisive stance, as parliamentary standing orders could only be suspended by unanimous consent. Douglas therefore reluctantly withdrew his opposition, aware that the urgent release of the funds contained in the Bill was necessary to restore financial confidence in the colony.[28]
In accepting the suspension of standing orders, Douglas put his duty to the colony ahead of his concerns over how it would be achieved. Although a stubborn and principled man, he recognised that the welfare of the colony was paramount. On withdrawing his opposition, the standing orders were suspended, the Bill passed, and the financial crisis addressed. The new ministry lasted less than three weeks, due to Herbert having to return to England. Despite being “palpably only a makeshift,” it had defused the financial crisis facing the infant colony.[29] But what was the effect of the crisis on Queensland and how were its deleterious effects overcome?
It had soon become evident that the financial crisis was not as serious as first thought, because on 22 July 1866 a telegram was received from the Agra and Masterman’s Bank stating that it would now be able to carry out its original agreement with the government.[30] As well, local banks had come to the rescue and the issuing of treasury bills had further alleviated matters. [31]  Despite this, existing public works were halted, including the laying of the Ipswich to Toowoomba railway line and the construction of the new parliament house. The consequent unemployment caused great distress, exacerbated by 156 bankruptcies that year,[32] resulting in widespread dissatisfaction and unrest. Immigration ceased, and there was a drift of unemployed workers to southern states.
The resultant recession only ended following the discovery of gold in what is now Gympie late the following year, where 15,000 diggers, many of them unemployed, converged.[33] Moreover, for the pastoral industry, which had been reeling from the effects of drought, the 1866 crash was equally serious, with prices and profits not recovering until the early 1870s.[34] With the worst of the crisis over, Herbert then followed up on his earlier pledge that as soon as financial provision had been made, he and his ministry would resign and seek re-election.[35]

[1] Alexander C. V. Melbourne. “Queensland History no. 44: The Financial Crisis of 1866, part 1.”  Daily Mail, 1 January 1927
[2] Ibid.
[3] S. J. Butlin. Australia and New Zealand Bank:  The Bank of Australasia and the Union Bank of Australia Limited, 1828-1951. London, Longmans, 1961, p. 170
[4] Alexander C. V. Melbourne. “Queensland History no. 45: The Financial Crisis of 1866, part 2.”  Daily Mail 15 January 1927
[5] Ibid.
[6] Butlin, p. 179
[7] Melbourne (1927A)
[8] John Douglas. Queensland Parliamentary Debates, vol 3, 1866, p. 270
[9] Melbourne (1927A.)  The Union Bank agreed to advance the £100,000 for current expenses, repayable from the new loan, on the strength of this arrangement with Agra and Masterman’s Bank. Agra and Masterman’s were keen to do further business in Australia, and were already using the Sydney and Melbourne branches of the Oriental Bank to raise deposits for its business in India. (Butlin, p. 179)
[10] Melbourne (1927A.)  Overend Gurney and Co. collapsed due to the over-development of dubious railway projects in England and Spain. (Faith, p. 93)
[11] Melbourne (1927A); R. B. Joyce. “George Ferguson Bowen and Robert George Wyndham Herbert:  the Imported Openers.”  In, D. J. Murphy and R. B. Joyce, eds. Queensland Political Portraits. Brisbane, University of Queensland Press, 1978, p. 37
[12] Butlin, p. 179
[13] Brisbane Courier, 13 July 1866. The dishonouring of cheques only occurred in a few isolated incidents and when brought to the attention of the manager of the bank, he instructed that no further cheques were to be dishonoured. However by then the damage had been done. (“Weekly Epitome.”  Brisbane Courier, 14 July 1866, p. 6)
[14] Paul Wilson. “Arthur Macalister.”  In, D. J. Murphy and R. B. Joyce, eds. Queensland Political Portraits. Brisbane, University of Queensland Press, 1978, p. 50; Bernays, pp. 35-36. The failure to secure additional credit came about because the banks insisted on drastic cuts to what they considered were extravagant public works while they also demanded increases in taxation. The other option open to the government was to issue treasury bills. (Butlin, p. 179)
[15] Queensland Government. Our First Half-Century:  A Review of Queensland Progress Based Upon Official Information. Brisbane, Government Printer, 1909, p. 35
[16] Fitzgerald, p. 128
[17] Wilson (1978), p. 50. Bowen compared the proposed inconvertible legal tender notes to the assignats of the French Revolution or the greenbacks of the United States Civil War (Bernays, p. 35.)  Debate also raged as to whether the governor had exceeded his powers by threatening to disallow a bill that he had not yet seen and attempting to interfere with the freedom of action of his ministry. For more information, see Marion Powell,  The Rise, Causes and Consequences of the Crisis of 1866 in Queensland.  B.Econ Hons thesis.  University of Queensland, 1969, pp. 81-88
[18] Butlin, p. 180
[19] Wilson (1978), p. 50; John Douglas, Queensland Parliamentary Debates, vol 3, 1866, p. 519
[20] “Financial and Ministerial Crisis.”  Brisbane Courier, 19 July 1866, p. 4
[21] Ibid.
[22] Queensland Government Gazette, vol 7 no 68, Friday 20 July 1866, p. 625; “Votes and Proceedings of the Legislative Assembly no 42, 20 July 1866, p. 1.”  Queensland Votes and Proceedings, 1866, p. 183. For a detailed account of what transpired, see Alpheus Todd. Parliamentary Government in the British Colonies. 2nd ed., London, Longmans & Green, 1894, pp. 185-87
[23] “Ministerial Crisis.”  Brisbane Courier, 20 July 1866, p. 2
[24] Ibid. Or, as Douglas diplomatically put it on 19 July, “I have but to mention that we are holding office only until our successors are appointed.”  (John Douglas. “Resignation of the Ministry.”  Queensland Parliamentary Debates, vol 3, 1866, p. 531)
[25] Bernays, p. 36
[26] Ibid.
[27] “Parliament.”  Brisbane Courier, 21 July 1866, p. 5. As Douglas informed the house: “he would oppose the motion, even if he did it singly. He felt that he would not be justified in absolutely ignoring the constitution. In his hand he held a Gazette, which contained the appointment of an essentially irresponsible commission to govern the colony. He would be no party to such proceedings; and, although he was taking a great responsibility upon his shoulders, he would oppose the motion. Even if a foreign enemy were invading the country, he would feel himself compelled to oppose unconstitutional acts such as those now occurring. He considered that the arrangement now inaugurated was nothing less than irresponsible despotism. The people of the colony valued their liberties sufficient to justify him in the conduct which he now assumed.”
[28] Ibid.
[29] Bernays, p. 37
[30] Alexander C. V. Melbourne. “Queensland History no. 46: The Financial Crisis of 1866, part 3.”  Daily Mail, 29 January 1927
[31] For instance, the Union bank assisted in disposing the unsold portion of the 1864 loan. (Butlin, p. 180)
[32] Alexander C. V. Melbourne. “Queensland History no. 47: The Financial Crisis of 1866, part 4.”  Daily Mail, 10 February 1927. For information on resistance by workers and the railway navvies’ strike, see Marion Powell, pp. 112-14
[33] Melbourne (1927C); Fitzgerald, pp. 129-30
[34] Fitzgerald, pp. 129 & 143-45; De Satge, p. 203
[35] Melbourne (1927B)