Between about 1883 and 1889 Melbourne experienced a rapid, uncontrolled and ultimately disastrous period of real estate inflation and speculation known to contemporaries and later historians as the 'land boom'. At its peak, around 1888-89, land values in some parts of Central Melbourne rose as high as those in central London, and the aggregate level of new building activity in the city increased by more than 50% at a time when national output rose by only 25%. The physical legacy of the land boom is visible throughout the metropolis in the opulent architecture of Gothic Collins Street, the palatial coffee houses standing by suburban railway stations, the far-flung rail and tram lines, and in the dates '1888' and '1889' proudly inscribed on the pediments of thousands of humbler buildings from factories to cottages.
As the land boom reached its peak, speculation on property and land became a mania. Buyers and sellers of share scrip in the many upstart land banks and mortgage companies jostled for space under the verandah of the Melbourne Exchange. Lured by free railway passes, eager speculators rode out to new estates on the suburban frontier, where they joined the crowds of other eager speculators consuming the vendors' free chicken and champagne before bidding got under way.
Historians' views of the land boom have inevitably been coloured by the catastrophic depression that followed it, the worst in Australia's history to that time. In his colourful account The land boomers (1966), Michael Cannon presents a comprehensive bill of indictment against the syndicates of reckless financiers and their political allies who lured so many small investors to their financial doom. Many of the land boomers were pillars of the Protestant churches and temperance societies, so their complicity in shonky land schemes, he suggests, was doubly reprehensible. Yet, as Geoffrey Curr notes, many of the boomers had themselves once been workingmen, and their puritan morality was congruent with the ethic of self-improvement that, at least originally, had inspired the building societies and suburban savings banks through which they had risen to influence. Other historians, less fixed on personal blame, nevertheless draw attention to the structural weaknesses appearing in the Australian, and especially in the Victorian, economy at that time. Noel Butlin argues in Investment in Australian economic development (1964) that the relative cheapness of funds on the London market tempted Australian borrowers, both public and private, to invest too heavily in projects, such as railways and residential housing, and office buildings, which would only show a return in the long term if at all. The crash, he argues, occurred because capacity ran too far ahead of demand rather than because of individual sins. Yet other historians suggest that, propelled by rapid population and economic growth, the boom was securely founded at least till 1889; they attribute the crash mainly to external factors, such as the Baring crisis, when heavy losses by the London banking house, Barings, in South America, precipitated panic among British investors who suddenly called in their Australian investments. All of these influences probably contributed in part to the outcome: the puritans becoming seduced by their own success, the external shocks acting on structures already weakened by distorted patterns of investment. When the boom burst, however, it marked a sharp reversal in the pattern of steady progress that Melbourne had experienced since the 1860s and memories of its painful consequences cast a dark shadow in the life of the city well into the 20th century.