Regular readers will know that I am not a big fan of the relationship between the media and the RBA. The most recent example of this dysfunction was the Board ‘leaks’ affair, as covered by myself, Alan Kohler, Stephen Kirchner, Adam Carr and ABC Lateline. (As an aside, I was actually on ABC Lateline last night, which you can see here).
The short story here is simply that most of the major media commentators (ie, Gittins, McCrann, Stutchbury, Mitchell etc) in Australia are beholden to the RBA for their ‘inside information’. This is a universally accepted fact. Setting aside the very serious legal and governance questions that the dissemination of highly confidential and price sensitive information to select members of the media creates, the heavy dependency of journalists on senior RBA executives for their key insights also effectively muzzles public criticism of the institution.
Because of the unusual, indeed awkward, position the RBA occupies in our society, whereby independent and non-democratically elected officials over which the polity has little recourse unilaterally control arguably our most influential economic lever—the determination of the price of money—you do not need to be Einstein’s son to understand why this stealthy cauterisation of criticism is unhealthy.
The RBA is acutely aware of the leverage it has over the media and uses it to perhaps understandably safeguard its recently-won independence and authority, which only emerged in the early 1990s and was formally instituted by the Howard Government in 1996. Most people have forgotten that at beginning of the 1990s the RBA was not internationally regarded as an effective central bank, and its history both before and during the last recession is littered with numerous policy mis-steps, which bank executives have repeatedly acknowledged on the record. The RBA’s excellent (and mostly sympathetic) historian, Professor Stephen Bell, describes the Bank-media dynamic as thus:
“The Bank uses the media strategically. It sometimes leaks information to selected journalists who act as its mouthpiece when it wants to put information about the market. As one former Bank official commented: ‘The Bank uses newspapers to manage expectations. It’s a game the Bank manages very well. Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.”Of course, this expectations-smoothing argument is a red herring. If the Bank wants to massage public expectations, which is the standard rationale for its less-than-desirable media relationship, it can give a speech wherein all of its intimations are made available to the public at the same time. Another experienced Bank-watcher, Dr Stephen Kirchner of the Centre for Independent Studies, is withering in his critique of both the RBA and Bell’s account:
“Like any other institution, the RBA is a self-interested actor that needs a well-defined governance framework to ensure that its actions are consistent with the public interest. The RBA’s practice of selectively leaking its policy bias to journalists, apart from showing disregard for procedural fairness in handling sensitive information, also suggests than it has a problem with transparency. Bell euphemistically calls this using the media ‘strategically’. He lets Macfarlane get away with statements such as ‘we already put out the most detailed account of any central bank when we do make a change’ in policy, yet the RBA’s explanations of its policy actions are little more than check-lists of factors influencing policy and its Statements on Monetary Policy are bland and descriptive compared to the more forward-looking and informative statements produced by the Bank of England and the RBNZ…Paul Cleary is also quoted saying that these Statements are a ‘little-known triumph of transparency’. These are laughable propositions for anyone with actual experience of other central banks. Even the Bank of Japan could make a good case for being more transparent than the RBA. Far from being authoritative, these comments only serve to highlight the low standards of the federal parliamentary press gallery.”So I expect the AFR’s coverage of the RBA’s ‘50th birthday’ to be a highly uncritical encomium that relays some of the old war-stories between the RBA and the Treasury, which have little-to-no relevance today.
For those interested in the historical record, the Fisher Labor government was responsible for creating the publicly-owned Commonwealth Bank of Australia, which was to eventually become Australia’s first central bank, in 1911. Interestingly, Labor’s motivation for establishing the CBA nearly 100 years ago was borne out of antipathy towards the private banks, which Labor felt were, in Stephen Bell’s words, “too vulnerable to collapse…profiteering, and that their lending practices tended to be pro-cyclical (excessive in an upswing and too restrictionist in a slump, driven by rapid shifts in sentiment from excessive optimism to deep pessimism).” It is fascinating to see how circular history is—the Labor critique of the early twentieth century is near identical to their UK heirs’ motif in the twenty-first.
The RBA formally recognises its 1911 birth date by listing its fist Governor as Sir Denison Samuel King Miller, who assumed the position in June 1912. In 1931, a future Governor, Nugget Coombs (who was appointed in January 1949), contemplated the changing role of the CBA at this time:
“It emerged as a national institution with a distinctive character and a definite place in the Australian economy. It had been the government financial agent in its dealing with the trading banks, the Bank of England, and with the Imperial government; it had raised and administered government loans; it had acted as a representative of the trading banks and adjusted bank differences…these were central bank functions.”In 1924, which was to prove to be a crucial year in the Bank’s life, note issue was transferred for the first time from the Treasury to the CBA. The Commonwealth Bank Act of the same year required that the private banks place their reserves with the CBA and therefore settle their accounts with it. And the conservative Bruce-Page government instituted an eight-member Board for the first time to dilute the otherwise autocratic powers of the Governor. It is amusing, however, to read how concerns about the integrity of the Board existed at the outset with another historian, Giblin, concluding that it was a “‘Board of amateurs’, playing less than a robust role, because its members were inexperienced and had little knowledge of central banking” (in Bell’s words). The debate regarding the effectiveness of the Bank’s Board still rages today, as I discussed here.
In 1929 the CBA was bequeathed authority over gold. In 1930 the Scullin Labor Government sought to further strengthen the central bank’s powers with the Central Bank Bill by formally separating its commercial and central banking activities. However, the bill was rolled by a non-Labor majority in the Senate underpinned by private bank lobbying.
Following the abandonment of the gold standard in 1931, the Bank was delegated control over the exchange rate. Yet it was to be the two 1945 Commonwealth Bank and Banking Bills that supplied the first explicit legislative acknowledgement of the CBA as Australia’s central bank, and “its main provisions still provide the statutory basis of the Reserve Bank” according to Bell. The Banking Bill dramatically extended the militant Chifley government’s regulatory control over Australia’s private banks with The Economist arguing at the time that “there is no concealing the animus against the trading banks which inspired this legislation”.
The Commonwealth Bank Bill had several important consequences for the nation’s central bank:
-It abolished the Bank’s Board and created a six-member Advisory Council including the Secretary of the Treasury;
-It required the Governor to maintain a ‘close liaison’ with the Secretary of the Treasury and to periodically ‘inform the Treasury of its monetary and banking policy’.
-It embraced recommendations from an earlier Royal Commission to expand the CBA’s central banking powers and mandated that the private banks lodge minimum reserve deposits with the Bank to enable it to manage liquidity;
The relevance of the 1959 Reserve Bank Act, which is the apparent focus of the AFR’s attentions, was quite trivial in an historic context. The effect of the Act was simply to formally divorce the CBA’s commercial and central banking responsibilities, which had both existed for a long time. Here Bell comments:
“The institutional remodeling of the Bank thus did not aim to remove or dilute the Bank’s central banking powers, but instead to restore greater trust and cooperation between the central bank and the private banks…Except on the separation of the central banking powers, the Act in content and spirit resembled the 1945 legislation.”So if we are going to wish the RBA a happy birthday, it would be 64 years based on the first legislative recognition of central banking, and 85 or even 98 years if one relies on the practical emergence of Australia’s central bank.
For what it is worth, my own assessment is that we probably do benefit from one of the best central banks in the world. Over time I have learnt that its extremely able executives, while institutionally conservative, are surprisingly flexible of mind. There is nevertheless much reform that remains outstanding and, as I have argued in the past, the Bank would be well-advised to pro-actively enact such change itself rather than having future adverse contingencies dictate the course of its evolution.
