A Brief History of Merchandise Credit in Australia
When Australia was settled in the late eighteenth century, the limited opportunities for trade were quickly exploited.
The first group of merchants were the civil and military officers who resold imported goods such as tea, sugar, tobacco, and spirits, through intermediaries, to the settlers. It was not business acumen that allowed these men this position, but their virtual monopoly on foreign exchange through paymaster’s bills and Treasury bills. The latter were given in exchange for store receipts issued by the commissariat as payment for wheat and meat.
The officers acquired a large proportion of these receipts through their trading activities. The extension of credit by these officer merchants was generally of fairly low risk, since their customers on the retail level were rapidly becoming wealthy by foreclosing on debts owed by settlers who had been extended credit on the basis of mortgage securities.
This monopoly was gradually weakened by the appearance of other merchants: professional merchants from Indian or English houses as well as emancipist traders. These merchants stimulated the economy by engaging in maritime and other activities in the search for export commodities that would provide foreign exchange. The officer merchants had previously paid for their imports in Treasury bills. In contrast, many of these new merchants had overseas trade connections, and a credit chain was established from the foreign exporter down to the settlers. With little control over the amount of credit thus extended, the value of imports rapidly increased and soon exceeded the colony’s ability to pay. These conditions exacerbated by severe droughts, caused depression and financial difficulties for many colonists in the period between 1812 and 1815.
The brief account above describes only three decades of colonial trade, and yet it reveals a pattern that was to be repeated several times. First, a stimulus to trade: in the 1820′s it was the Industrial Revolution in England and the consequent greatly increased demand for fine wool; in the 1850′s it was the gold rush and the sharp increase in population; in the twentieth century it has been the discovery of minerals and the great technological development. A period of expansion and optimism follows. There is a sharp increase in economic activity and in living standards. This upward spiral of economic growth is supported and further stimulated by the greater availability of credit and investment capital. However, in these boom periods, credit is often granted carelessly and for ventures that do not give adequate returns. Optimism gives way to pessimism and recession occurs. While this downturn is often precipitated by other factors such as drought or economic conditions overseas, it is always marked by an abrupt withdrawal of credit and investment funds, and consequently, widespread bankruptcy and business failure. Such recessions occurred in the 1840′s, the 1890′s, and the late 1920′s.
Today, almost all sales above the retail level in this country are conducted on a credit basis, and the dollar value of such sales is at an all-time high. The contribution of the credit system towards the high living standards we enjoy is significant. Credit when properly extended provides responsible people with a supplement to their own capital through money, goods and services which they can put to use in creating further wealth. However, the lessons of history cannot be ignored: if no serious brakes are applied to the extension of credit in boom periods and many unwise loans and credit exposures are made, disastrous results are inevitable.