The market for finance in late nineteenth century New Zealand with special reference to rural mortgages

The finance market in late nineteenth century New Zealand can be divided  into three sections; lending on mortgage, on lien (and insurance  policies), and bank lending. Using the records of the individual loans  found in the discharged mortgages and the Mercantile Gazette, and  supplementing this by case studies of individual lenders, agents, banks  and regions, this thesis analyses the conditions under which each  section provided finance to the market, paying particular attention to  the provision of finance to the rural sector in the period 1886 to 1901.  Throughout the period the majority of finance was provided by the  mortgage market, and the trend was for this section to increase its  dominance at the expense of bank lending and liens. The decline of liens  was a long-term trend, a reflection of the failure of the instrument to  become common in dairying areas and the greater security of mortgages.  But the relative decline of bank lending was part of a larger pattern of  the decline of financial institutions. This was the result of the  decline of British funds in the New Zealand financial system.  In the 1880's both the trading banks and the pastoral finance companies  grew through an inflow of British deposits. The withdrawal of these  deposits after 1886 meant that both of these institutions, the two  largest in the New Zealand financial system, could not expand their  lending. The mortgage market did expand using the rising volume of local  savings, arising particularly in the rural sector as initial  colonisation gave way to established farms, and as dairying and frozen  meat revived farm incomes. Despite the Government Advances to Settlers  scheme, which began in 1894, by 1901 direct lending without formal  mediation by financial institutions provided the majority of funds lent  in the mortgage market. This made the work of the informal  intermediaries - solicitors, merchants, land brokers and others -  important for ensuring the efficient movement of funds. This work was  performed successfully.  The decline of the financial institutions was paralleled by the decline  in direct foreign lending. The risk-averse lender attracted to New  Zealand mortgages felt less than adequately rewarded as New Zealand's  interest rates fell with the rise of local supplies of capital. This was  found not only in New Zealand investments: the Australian colonies,  Canada and the American mid-west experienced a similar interest rate  pattern as their economies matured. This forced the British lender and  financial institutions to move to less developed regions, notably the  River Plate.  In New Zealand this led to a reluctance of many institutions and foreign  lenders to renew the short-term mortgages in the early 1890's, meaning  that refinancing debt was an important source of demand in this period.  The growth of direct lending in the late 1890's was accompanied by a  rise of the two other sources of demand, land purchase and land  development.  By 1901 the market had reached a new equilibrium based on local supplies  of capital. This balance was more favourable to the borrower than in  the 1880's, and this probably encouraged the economic growth of the  early twentieth century.