Moreover, the Australian depression of the 1840s was comparable in severity to the disastrous depressions of the 1890s and 1930s (Butlin 1994: 223).
In the 19th century Australia had two severe depressions, and mild to severe recessions in 1867 (0.42% GDP decline), 1870 (GDP fell by 3.32%), 1878–1879, and 1885–1886.
One of the worst downturns in the business cycle was the depression from 1890 to 1893, exacerbated by the financial crisis of 1893 (see Hickson and Turner 2002). Australia had a massive property bubble in the 1880s under a gold standard and a free banking system. Before 1893 there was a speculative boom, in real and financial assets, fuelled by inflows through the capital account, mainly from Britain. Then came the collapse of the asset bubble in 1889/1890:
“In Australia, GDP fell for four years running, from 1890 through 1893 ... Unemployment rose sharply. Immigration slowed and tentatively reversed direction. Social disorder spread, led by protesting sheep shearers, dock workers, and miners. Post-1893 recovery, if it may be called that, was slow and uneven” (Adalet and Eichengreen 2007: 233).In Australia, real GDP fell by around 10% in 1892 (Kent 2011), and by 7% in 1893, and deflation occurred from 1891 to 1897. After 1895, growth returned but the economy was mired in what we can call a chronic underemployment disequilibrium, just as many countries were in the 1930s.
Australia in the 1880s is an example of a system that probably came closest to a libertarian free banking system than any other nation in the past two centuries. The disastrous failure of that system is empirical evidence that free banking is not the best or ideal system imagined by libertarians.
Adalet, M. and B. Eichengreen. 2007. “Current Account Reversals: Always a Problem?,” in R. H. Clarida (ed.), G7 Current Account Imbalances: Sustainability and Adjustment, University of Chicago Press, Chicago. 205–246.
Butlin, N. G. 1962. Australian Domestic Product, Investment and Foreign Borrowing 1861–1938/39, Cambridge University Press, London.
Butlin, N. G. 1994. Forming a Colonial Economy, Australia 1810–1850, Cambridge University Press, Cambridge.
Glasner, D. and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York.
Haig, B. 2001. “New Estimates of Australian GDP: 1861–1948/49,” Australian Economic History Review, 41.1: .
Hickson, C. R. and J. D. Turner. 2002. “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
Kent, C. J. 2011. “Two depressions, one banking collapse: Lessons from Australia,” Journal of Financial Stability 7.3: 126–137.
Simon, J. 2001. “The Decline in Australian Output Volatility,” RBA, Research Discussion Paper 2001–2001.