Story: Business failures and corporate fraud
Page 2 – 19th-century business failures
There were two main sources of business failure – reckless immigration schemes and property speculation – in the first 25 years after the Treaty of Waitangi was signed in 1840.
Immigration promoters sold land, sight unseen and without clear right to title, to investors and intending settlers in Britain. The largest of these schemes was the New Zealand Company, a colonising agency and joint-stock company. But the lack of legal basis to its land claims, conflict with Māori (especially on the Wairau plains in 1843), the fall-off in migration and the inability to establish grain-based agriculture brought severe financial problems, which were only alleviated by government support.
There were also other failed schemes, such as the Cornwallis settlement on the Manukau Harbour. Promised a town section, 100 rural acres and a year’s wages, the Scottish settlers found on their arrival in 1841 that the land was in dispute. They never received their wages.
Such failures caused hardship for settlers and hurt British investors. They made it harder for New Zealand businesses to borrow in overseas financial markets.
Many buyers at the first Crown land sales in Auckland in 1841 were speculators who bought on deposit, some of only 10%. When the economy fell into recession in 1842, many were unable to keep up payments. The flow-on effect led to almost all of Auckland’s merchants going under.
The 13 government officials who bought property in the 1841 Auckland land sales were dubbed ‘the Auckland official land-jobbing association’. Jobbery meant using public position for private gain. The jobbers knew the best sites, and probably the reserve prices, but were meant to be banned from speculation. Some were eventually forced to give up the land they had bought.
Among those who bought land in the 1841 auctions was George Cooper, the treasurer and collector of customs. Later he was forced to resign and convicted of malversation (misuse) of customs money – apparently to fund land purchases and a lavish lifestyle.
19th-century Auckland was a city of booms and busts. The city was tagged ‘the grave of enterprise’ because ‘the cards of commerce are constantly shuffled [there] so as to cause rapid rises and disastrous declines among business houses large and small’.1 In 1863–64 army contracts for the Waikato wars pushed up prices and created fortunes. Then in 1865 the boom collapsed, Wellington became the capital and commercial panic set in. The discovery of gold in Thames in 1867 lifted fortunes again.
Auckland’s business community was dominated by a small group who were commercially and socially related, led by Thomas Russell and his law partner Frederick Whitaker. The group founded the Bank of New Zealand in 1861, and borrowed from it to speculate in confiscated Māori land. The failure in 1878 of the City of Glasgow Bank led to a withdrawal of British funds, and some Auckland businesses failed.
In 1886 there was a serious economic collapse in Auckland, and within two years there were major crashes. The Bank of New Zealand was in acute difficulties and withdrew loans. The very respectable Union Sash and Door Company collapsed, and many small business people like carpenters, hotelkeepers and petty shopkeepers went to the wall.
Even the very rich suffered. The entrepreneur J. C. Firth became bankrupt, and the merchant John Logan Campbell was forced to pay off his gardeners. Thomas Russell survived only by questionable methods which included setting up land companies. He succeeded in avoiding both legal prosecution and bankruptcy.
From poor to rich
Bankruptcy in the 1880s depression was often the making, not the end, of a person’s career. George Stead had co-founded a grain company in Canterbury, but became bankrupt in 1884. Stead repaid the £72,000 owed to farmers and shareholders although he had no legal obligation to do so. He re-established his reputation and became the leading figure in Canterbury’s business community.
Further south the hard times had hit earlier. The late 1870s and 1880s were particularly hard on many small businesses that had been established in the previous decade. In 1879 there were 1,836 bankruptcies, the highest annual number for the next 100 years. On a per capita basis it was more than seven times the bankruptcy rate of any year in the 20th century.
Dredging booms and busts
In Otago there were two booms in gold dredging (in 1888–90 and 1899–1900), each of which was followed by a bust and the liquidation of companies. In July 1900 there were 300 dredging companies, but by January 1902, 104 had collapsed. Another 72 failed over the next year.