Financial Markets & Institutions Essay

3902 words - 16 pages

1 - GREAT DEPRESSION(1.i) PREVAILING CONDITIONS & MAJOR CAUSESDuring 1920/21 widespread deflation in the value of US farms, on average 50%, led to record numbers of farm foreclosures. Banks responded by radically tightening lending polices, effectively ceasing to draw new loans to legitimate customers and businesses. Farm foreclosures weakened the balance sheets of hundreds of rural banks leading to a epidemic of Bank failures averaging 600 per year throughout the 1920s and predominately in the agricultural regions of the US (L B Thomas 1997).Sharp reductions in US import levels impacted world markets, driving down demand and prices. Worst affected in Australia were primary producers who ...view middle of the document...

The problem was further compounded by the mismanagement of loans by some States, most notably NSW. All of these pressures lead to a liquidity crisis, where Australia was unable to secure long-term loans from either London or New York and were forced into a series of short-term overdrafts. By the beginning of 1930, Australia short-term debt had ballooned to ?3.1m leading to a struggle by avoid default in public interest obligations throughout the depression period (Schedvin 1970).(1.ii) EFFECT ON AUSTRALIAN ECONOMY AND FINANCIAL SYSTEMPrior to the depression, Australia had made only desultory efforts to establish a central bank, most notably in 1924 when the National Country Party introduced legislation that replaced the Governor of the Commonwealth Bank with a Board of Directors, vested the bank with control of the issue of Notes, and formalised requirements for the settlement of all cheques via deposits at the Commonwealth Bank.The Great Depression highlighted the impotency of the powers that had been granted the Commonwealth Bank. With no control of the nation gold reserves, it was unable to maintain the desired exchange rate, it had no control over the lending practices or reserve levels of private banks, hence was powerless to ensure that depositor funds were secure, and interest rates were set by the private banks at their discretion with little or no consultation with Government.Through 1936-1937 a Royal Commission into the monetary and banking system investigated the inadequacies of the existing system. The commission subsequent report released in 1937, proposed that the central bank be vested with the responsibility for supervising and directing private banking institutions. In addition the Commission recommended that a portion of the trading banks?declared deposits be kept in reserve with the Commonwealth Bank Central Banking Division (CBD). The commencement of World War Two in 1939 saw the report relegated to the back burner while pressing world events took precedence.In 1941 the National Security (Wartime Banking Control) regulations were imposed which formalised much of the controls that the private banks had been obliged to relinquish voluntarily due to the war. The regulations also instituted the requirement for all trading banks to be licensed; transferred control of interest rates to the Commonwealth Bank CBD and the Federal Treasurer, and control of exchange rates to the Commonwealth Bank CBD; implemented rules regarding trading banks investment policies and requirements regarding the deposit of surplus funds with the Commonwealth Bank CBD, as well as instigating requirements for private banks to report their financial affairs to the Treasurer and Commonwealth Bank CBD as required.In 1945 the Labour Government introduced two pieces of legislation, the Commonwealth Bank Act 1945 and the Banking Act 1945. The new pieces of legislature gave further strength to the central bank functions of the Commonwealth Bank CBD such as control...

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