From The People’s Bank to the Banker’s Bank

Last week Australia’s central bank (Reserve Bank of Australia, RBA) raised interest rates. Again.

Political economists have been talking for decades about the RBA’s tendency to redistribute wealth from the bottom upwards. But now it seems most people understand that the latest interest rate rises requires ordinary people to hand over more of their cash to their bank, to get it out of circulation and bring down inflation.

Asking whether superannuation or taxes could also be used for the purpose of reducing interest rates, the ABC pointed out that interest rates were not always the way inflation was managed. They published an article asking ‘Would you rather hand over an extra $300 a month to your bank or the federal government?’ – suggesting that this might even be an option.

Rightly, the ABC points to the place of government in setting up this structure. But history shows that for all that government is nominally in charge. Well. You might have noticed that banks are fairly powerful. Government v bank doesn’t always mean the government wins…as we will see.

I recently published a review of Bob Crawshaw’s Battle of the Banks, which is about the role of the media in what nearly every historian agrees was a controversial (sometimes seen as just plain mad) decision on the part of 1940s Labor Prime Minister Ben Chifley to try to nationalise Australia’s banking sector.

We have a number of accounts of this fairly notorious episode in Australian history. This one might be the most rollicking. Here is my review, though you probably need institutional access to the Journal of Australian Studies to read it. Yell out if you can’t and I can send you a pre-published version.

The basic story of the battle of the banks is this:

• The Curtin/Chifley governments had been able to use the banking system( especially the ‘People’s Bank’, the Commonwealth Bank of Australia, which was owned and operated by the government as a central, merchant and trading bank) to help finance Australia’s participation in the Second World War.
• They now sought to use similar measures to enable them to finance Post-War Reconstruction, which among other things included a very substantial housing program, which they said would fulfil all the dreams of ‘Mrs Australia’.
• To do this, there was a new banking Act. Led by what is now NAB, the commercial banks challenged the Act in the High Court. Based on a bit of the constitution about money moving across state borders as a foundational goal of federation, one of the provisions of the Act (requiring local government to bank with the Commonwealth Bank so that the flow of cash would help finance housing) was deemed unconstitutional.
• Evidently pissed off, Chifley called a Cabinet meeting where it was agreed that since this Act was bust, they would nationalise the banks.

At this point nearly every historian (including Crawshaw) declares this to be ‘rash’, as if Chifley just thought it up out of pique and somehow bulldozed cabinet into this crazy plan.

But in fact bank nationalisation has been Labor policy for several decades.

Populist Money Movements

Historian Peter Love wrote an excellent book a while back now about populist opposition to ‘the ‘money power’, which grew as banking became more influential in the development of Australian capitalism.

Peter Love shows they way this movement helped cohere working class activism in the face of multiple crises, especially the bank crashes of the 1890s and the 1930s Great Depression.

In the 1920s, opposition to the ‘money power’ also coalesced into a politics attached to Douglas Credit. This was a (kinda wacky, in retrospect) idea that a new kind of money could be distributed as as a kind of ticketing system. This would guarantee consumer demand on one hand, and redistribute national wealth on the other, rather than allowing historical power blocs to accumulate more, while others have insufficient money to purchase what they need. It is a precursor, in some ways, to both MMT and a universal basic income.

In the 1920s when ideas and practices of banking, money, economics and politics were still a little more up for grabs than they now seem, the labour movement’s anxiety about the money power helped give Douglas credit political potency. The political party linked to the idea made some progress in the 1930s.

During and after the Great Depression, the idea that we could fix things by issuing currency differently took such hold that it grew into a key reason (on the surface at least) for a Royal Commission into the Monetary and Banking Systems in Australia, commencing in 1935 and reporting in 1937. Reading the report and the submissions from banks, one gets the impression that Social Credit was the public reason for the Royal Commission. Underneath it – at least to my (fairly cursory…SO FAR) reading – was a desire to consolidate data about banking to see what sort of regulation and coordination the sector needed in the wake of the Great Depression.

I wrote about this recently for Griffith Review.

Banks are a utility

The final report of the Commission (1937) includes a dissenting report by Chifley. In it, he describes the way that banking has become more important in the past half-century or so.

Emerging in modern form as a partner of the state, helping facilitate fiscal policy, in other respects banking was a marginal industry on the edge of international shipping. It was crucial to that, though, providing the money needed to ship (say) you wool clip to England to meet a contract. In return for this service, banks took a cut, known as the ‘discount rate’. This was core business to such a degree that some 19th century banks didn’t even accept deposits. That wasn’t what they were there for.

Beginning with the 1851 gold rush (I think), this began to change in Australia. Becoming buyers and sellers of gold set them up as deposit-holders because a deposit was the better way to pay for gold.

And slowly, slowly – too slowly for some farmers and small business owners – they also became providers of business credit.

So in 1937, Ben Chifley looked at this system and saw that nothing could happen in the economy without the banks. It was a utility. In my Griffith Review piece I likened banking-as-utility to sewage. It is essential, but also full of shit.

That time Australia nearly nationalised all the banks

As a utility, Chifley thought that (a) nationalisation was best, but in the absence of that, what with how all the other commissioners were more conservative and were never going to back nationalisation, (b) banking profit rates should be seriously limited. Chifley had some specific suggestions, but the commissioners did in fact agree that the government could consider limiting bank profits.

For Chifley limiting profits would ensure government had the cash it needed to do stuff and/or money was circulating in the economy where it belonged (a key factor during the Great Depression to be sure), rather than flowing relentlessly into the coffers of the banks’ rich shareholders, redistributing national incomes straight into the pockets of the ‘money power’.

We should briefly note that the situation Chifley saw has only intensified. Since bank deregulation, home loans are the big asset on banks’ balance sheets. These are created from nothing (kind of), secured against the ever-rising value of real estate. They are like a vacuum, created to hoover up wages.

So Chifley’s attempt to nationalise the banks in the 1940s was not such a mad plan as it seems in retrospect. It not only reflected longstanding Labor policy, but it also embodied Chifley’s 1937 observation that banking was the sewage system of the economy: public (economic) health depends on its effectiveness, and a focus on very high profits was likely to fuck up its very purpose.

From the people’s bank to the bankers’ bank

Spoiler alert: Chifley failed. The proposal was that banks would be compulsorily acquired at the commercial rate independently assessed and where every bank worker would keep their job at the current pay rate or better. But in the anti-communist moment, the banks were able to leverage wider dissatisfaction with Chifley to ensure he would not be elected and that their fella, conservative visionary Robert Menzies, would be.

Chifley’s opportunity was gone. And the banks now felt themselves to be unstoppable.

While they were on a roll they decided to go after the Commonwealth Bank, known then as ‘the people’s bank’.

The commercial banks really, really didn’t like that this central bank also competed with them as a trading bank. Just like Rupert Murdoch doesn’t like the existence of the government-funded national broadcaster, the ABC, they felt that the Commonwealth Bank had an unfair commercial advantage.

So, the pressure mounted until the central bank and the trading bank roles were separated. The Reserve Bank of Australia was established as the central bank in 19t60, separating out this goal from the Commonwealth Bank.

Whatever else they may be, we would hardly describe either the Commonwealth Bank or RBA as a ‘people’s bank’ any more. And the power of the banks, not to mention their incredible annual profits, has certainly not lessened – even after another, much more scathing, Royal Commission in 2017-18.