Free banking gone awry: the Australian banking crisis of 1893

Australia during the second half of the nineteenth century experimented with a free banking system. However, the severe banking crisis experienced in 1893 poses a difficulty for proponents of free banking as they argue that such systems should be free from instability. We suggest that the few regulations that Australian banks faced were either not credible or had minimal impact on bank prudential behaviour. Using data on individual banks and the overall banking system, we go on to suggest that the 1893 banking crisis was the natural outcome of an unregulated environment. We also examine the role played by the colonial governments during the crisis.