The RBA described the 1880s Melbourne land bubble like this:
The potential for ‘bubblesʼto have a wider impact strengthened dramatically from the 1880s. The financial system was broadened by an expansion in the number of banks, their greater geographic reach through the establishment of branch networks and by the growth of non-bank financial institutions. The ratio of the assets of all financial institutions to GDP rose from 55 per cent in 1881 to 115 percent in 1891. The growth of credit shifted the demand schedule for all manner of assets to the right, not just Melbourneʼs land and property. Though still a small minority, many businesses that owned and traded in real estate, pastoral land and mining leases had listed on the emerging stock exchanges. A market in secondary claims encouraged more people to participate in the speculation. The market value of securities listed on the Stock Exchange of Melbourne rose from 18 per cent of national GDP in 1884 to 31 per cent in 1889.
The rapid growth in credit fuelled the Melbourne ‘bubbleʼ. The growth of the share market, comprised of more listed companies, and with higher daily turnover was another important contributory factor. Asset prices were marked to market on a daily basis and reported in the press. The gains of holding securities were there for all to see. Transaction costs of trading financial securities were, as John noted, lower than dealing in real property or other physical assets. The market looked relatively safe, risk could be diversified and you could cash out in a liquid market. Market-makers were important catalysts. Company promoters and share brokers assured investors and clients that this game of pass-the-parcel would never end.
