A Perfect Mania #1: Livestock Price Bubble 1837-1844
A PERFECT MANIA
Livestock Price Bubble 1837-1844
1. MARKET INTELLIGENCE
There was something slightly discordant between what squatters in the Port Phillip District thought was happening in the livestock market and their own personal experience of it -- between their impressions of fluctuating supply and demand and the actual prices they paid for their sheep and cattle in the early settlement period. The following two examples are from Captain John Hepburn (Smeaton) and William 'Big' Clarke (Dowling Forest, Pyrenees), who both wrote in response to Lieutenant-Governor La Trobe's request for information in 1853 (more than a decade after the events they were asked to recall).
1.2 Captain Hepburn
Bride & Sayers, 1983, Letters From Victorian Pioneers, Currey O'Neil, Melbourne, pp. 65-6 (italics added)
"On my arrival in Sydney [Hepburn was actually returning to Sydney from Port Phillip having been a party in the first overlanding of cattle to the new settlement in late 1836] I found Port Phillip was attracting much attention, and to keep up the excitement I addressed a letter to the editor of the Colonist newspaper stating the possibility of running a post [cross-country by horseback from Sydney to Melbourne using the route the overlanders had found]...About the middle of the year 1837 a perfect mania took place; the price of sheep advanced to 60s. per head. In consequence of this I was long before I could make final arrangements for my settling, my exchequer being too low to meet the prices. However, I met with another old tar and also an old colonist and we entered into a partnership...My share (my partner putting in an equal share) was 700 ewes at 55s., 1,925 Pounds, 25 rams, 150 Pounds; 100 wethers for use, 100 Pounds; supplies, drays, bullocks, etc., etc., 575 Pounds; so that my debt to my partner amounted to 2,750 Pounds, without interest for five years. No man in his senses would have undertaken to pay such a debt from 700 ewes, which was all the producing stock when the partnership had terminated...My partner then sold to me, not wishing to have anything more to do with sheep. I had many difficulties to surmount with such a debt, for all was credit. However, I paid all in time with interest, so I may safely say I never fingered one shilling I could call my own for nearly ten years."
1.3 'Big' Clarke
Bride & Sayers, 1983, Letters From Victorian Pioneers, pp. 280-1 (italics added)
"Notwithstanding the present result ['the stock of 2,000 I commenced with now count upwards of 80,000, and I have sold and boiled down for these last four years, on an average, 12,000 per annum, and have shipped, from this stock alone, for several years past, nearly 800 bales of wool, worth upwards of 20 Pounds per bale], I beg to observe the loss was great for the first seven years. Having had the stations of Dowling Forest and Pyrenees [Woodlands] valued seven years after I first settled [in 1837], the expense of carrying them on, with the first cost of sheep, etc., with interest added, amounted to double the amount of the highest value that could then be set on them, after giving credit for all sales of wool, etc. This arose chiefly from the great difference in the value of sheep, as when I shipped the original from Van Diemen's Land, sheep were worth upwards of 2 Pounds per head, and at the expiration of seven years, they were only worth from 3s. to 3s. 6d., for which price I bought one of the best stations in Victoria, situated at Maiden Hills, from a Mr. Hodgkinson; but from that time [in 1844] sheep-farming has gradually improved, and everyone that has manged his flocks properly cannot have any occasion to complain."
In 1837, both Hepburn and Clarke paid big money for ewes in the belief that the limitless tracts of good grazing land in the Port Phillip District would enable them to breed their way out of the debts they incurred to get started. They assumed that the natural increase of their sheep and the export of their wool production would, within a few years, compensate them for the initial high cost of their investment (even if it was on credit!). Neither Captain Hepburn nor 'Big' Clarke were stupid men. But, at that stage of their careers, they chose to ignore the warning signs of inflationary livestock prices and took the gamble on it all working out in the end.
2. INVESTORS' EXPECTATIONS
Robert Skidelsky, 2003, John Maynard Keynes 1883-1846, Pan Macmillan, London, pp. 331-3, 529-33
In the two examples quoted above, there are indications that the squatters had regard to their impressions of the market-place but this did not ultimately dissuade them from their investment, even at the high nominal prices they paid for livestock. The twentieth-century economist John Maynard Keynes calls these intangible aspects of investment decision-making market expectations. Classical economists in the nineteenth century concentrated on theoretical 'law of scarcity' to make their predictions -- the physical parameters of supply and demand, with the price mechanism simply reflecting their relative competing strengths in a rationally calculated 'free' market. Keynes's new emphasis was on a 'law of uncertainty' -- a psychological impetus based on "people's expectations of future market conditions".
2.2 On Keynes' 1926 A Tract on Monetary Reform
"In the long run, Keynes wrote, we are all dead...What Keynes meant by this, the most famous of all his remarks, was that in the short run, changes in the speed with which people spend their cash -- what economists call the velocity of circulation -- can change prices independently of changes in the quantity of cash. What happens according to Keynes is that they speed up their spending when prices are rising and slow it down in the reverse case."
This may seem contradictory from a consumer's point of view. However, for investors and businesses it makes commercial sense. The fact of rising prices increases profits. The prospect of rising prices encourages them to bring forward their spending decisions, in large part to minimise the costs of future inputs by locking them in at current prices.
2.3 On Keynes' 1936 The General Theory of Employment, Interest and Money
"It is in his explicit recognition of the effect of uncertainty on human behaviour that Keynes's break with the vision of Classical economics arises. Classical economics was concerned with the logic of choice under conditions of scarcity; Keynes's economics with the logic of choice under conditions of uncertainty. This shift in perspective leads to a radical interpretation of the psychology of action. What Keynes calls the 'propensity to save' is associated less with the urge for a better tomorrow than with anxiety about tomorrow. Investment, too, is less a matter of rational calculation than of 'animal spirits'. Uncertainty, therefore, imposes a kind of permanent fearfulness about the future which puts a damper on economic progress. Economic activity can be lifted out of its normal rut only by the stimulus of exciting events."
A 'modern' example of the operation of 'animal spirits' is in the volatility of share markets, where the rate of return on the amount invested, or 'yield', should be (in classical theory at least) the sole determinant of individual share price. "Keynes' starting point is 'the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made'. The stock exchange reduces the riskiness of investments by making them 'liquid' for individuals, but this makes investment as a whole much more volatile, since investors can buy and sell at a moment's notice. Share prices depend not on real investment prospects, but on prevailing sentiment, which can fluctuate violently with the days news. It is the flimsiness of knowledge supporting conventional share valuations which makes the investment function peculiarly dependent on 'animal spirits', defined as a 'spontaneous urge to action rather than inaction'."
The above quotations from Skidelsky's biography of Keynes are not intended as an accurate or comprehensive summation of Keynesian economics. My purpose is only to extract some Keynesian insights into the psychology of investment, using them as an aid to understanding the phenomenon of 'boom and bust'. Both economic theories can be applied to the colonial livestock bubble. The most plainly applicable is the physical, or quantitative, explanation of classical economics, which is 'the law of scarcity'. The glowing reports of Australia felix from a number of sources in 1835 and 1836 prompted a demand for sheep that could only partly be supplied by existing livestock producers in the established areas of the colonies of New South Wales and Van Diemen's Land. Prices consequently rose. There was 'too much money' chasing 'too few goods', in a classical price spiral of demand outstripping supply. But there was also an element of Keynes's 'psychological law' -- the law of uncertainty -- operating in this market too. That is, prices for sheep were elevated by more than the physical limitations of availability. There was an accompanying spirit of urgency, an increase in the speed with which people spent their money (and borrowed the capital of others). What began as a normal response to increased demand and static supply became exaggerated and prolonged. A bubble of speculative enthusiasm, which becomes larger and lasts longer than the 'rational' law of scarcity would predict, inevitably bursts with more devastating effect. As the boom is more pronounced, so is the subsequent bust. In this case, and using Big Clarke's figures, the 3 Pounds per sheep of 1837/38/39 dropped to the 3 Shillings per sheep of 1840/41/42/43. Interestingly enough, the resulting colonial recession did nothing to slow the rate of squatting expansion into the interior.
3. EXPONENTIAL EXPANSION
Michael Cannon, 1998, The Roaring Days, Today's Australia, Melbourne, pp. 83-84, 303, 308
(Details from official squatters' and commissioners' annual returns, part of Governor Gipps' report to the Colonial Secretary in London, 3 April 1844, and mapped in 'SKETCH Showing the Squatting Districts in NEW SOUTH WALES, 1844: Statistical Information is up to the end of the Year 1843'.)
"The results of Bourke's land legislation [the Governor's Squatting Act of 1836 which 'licensed' the squatters occupation of the 'waste lands' of the Colony of New South Wales beyond the boundaries of the 'Nineteen Counties' declared in 1829] were incredible. In less than seven years, almost the entire fertile arc outside the established counties, ranging from Brisbane in the north to Melbourne in the south, had been opened up.
By the end of 1843, working from north to south, Moreton Bay District had 17 licensed squatting stations running 75,000 sheep. Darling Downs had 26 stations with 110,000 sheep. Clarence River had 41 stations with 120,000 sheep. McLeay River had 13 stations with 20,000 sheep and nearly as many cattle. New England had 83 stations with 425,000 sheep and 37,000 cattle. Liverpool Plains had 136 stations with 175,000 sheep and 125,000 cattle. Bligh had 46 stations with 130,000 sheep and 30,000 cattle. Wellington had 66 stations with 175,000 sheep and 36,000 cattle. Lachlan had 183 stations with 146,000 sheep and 54,000 cattle. Murrumbidgee had 172 stations with 226,000 sheep and 93,000 cattle. Monaro had 129 stations with 200,000 sheep and 75,000 cattle. Murray [including Gippsland] had 510,000 sheep and 45,000 cattle. Westernport [including Portland Bay (the Western District)] had 710,000 sheep and 35,000 cattle."