The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, January 21, 2010

Updated: Central bank wonderings...

One might understandably be led to believe by the noise surrounding the RBA’s 50th anniversary celebrations that this was also the birth-date of central banking in Australia. This assumption would be wrong. As I have explained in some detail previously, Australia’s first central bank was founded 66 or 87 years ago, depending on your historical judgments. The establishment of the RBA in 1959 was no more than an administrative formality that separated the existing central banking and commercial finance functions of the Commonwealth Bank of Australia. The RBA is upfront in acknowledging as much in the 'autobiography' posted on its website (emphasis added):

“The Reserve Bank Act 1959 preserved the original [Commonwealth Bank of Australia] corporate body [which had been established in 1911], under the new name of the Reserve Bank of Australia, to carry on the central banking functions of the Commonwealth Bank, which had evolved over time; other legislation separated the commercial banking and savings banking activities into the newly created Commonwealth Banking Corporation.”

As this paragraph makes clear, the 50th anniversary date is of interest because it resulted in a name change and the clear division of the Commonwealth Bank’s commercial and central banking activities.* Yet the original central banking body corporate was retained. This begs the question as to why the RBA is making so much of the 1959 date, rather than the much earlier inception of central banking itself. I guess it is nice to have something to celebrate. And the half century mark certainly has a more resonant ring to it than, say, 87 years ago, which was roughly around the time when the RBA accepts that central banking formally materialised in Australia. To again quote the RBA’s self-penned history (emphasis added):

“In 1924, the Commonwealth Bank Act was amended and the Bank was given control over the note issue. Management was then vested in a board of eight directors, including ex officio the Governor and the Secretary to the Treasury. From this time until 1945… the Bank gradually evolved its central banking activities…These included exchange control and a wide range of controls over the banking system (including authority to determine advance policy and interest rates, and to require private banks to lodge funds with it in special accounts)… The new Commonwealth Bank Act and the Banking Act, both of 1945, formalised the Bank's powers in relation to the administration of monetary and banking policy, and exchange control.”

In 1931, a future Governor, Nugget Coombs, who was to be appointed in January 1949, reflected on the changing role of the CBA during the post 1924 period:

“[The CBA] 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.”

What is possibly more bizarre is that in the very short bibliography of historical texts the RBA refers readers to on its website, it has explicitly chosen to exclude the only major historical work published on it during the last 18 years (I have brought this apparent oversight to their attention, but it has not been remedied). The most recent independent reference the RBA supplies us with in its list of “accounts of the Australian monetary system and the RBA's development” is from way back in 1992, which pre-dates both the RBA’s independence and the formal adoption of its inflation-targeting framework. The RBA would probably be the first to concede that the institution that existed prior to 1992 bears little resemblance to the organisation that is often lionised by a captive media today.

The most comprehensive historical account of central banking in Australia was produced by Professor Stephen Bell, who is a leading academic researcher and the current Head of the School of Political Science and International Studies at the University of Queensland.

Bell’s 2004 book, Money Mandarins: The Reserve Bank and the Politics of Money, is a generally sympathetic analysis of the RBA, and was written with the close cooperation of all the modern Governors (ie, Bob Johnston, Bernie Fraser, and Ian MacFarlane, who had an especially influential hand), many past and present officers and Board members, the relevant Treasury Secretaries, and principal political actors (viz., Treasurers Keating and Costello). In a review of Bell’s text published by the Centre for Independent Studies, Dr Stephen Kirchner, a noted RBA watcher, summarises his efforts as thus:

“Money Mandarins is a thorough examination of the evolution of monetary policy governance in Australia. Bell’s main focus is the process by which the RBA has become increasingly independent of government and its implications for macroeconomic policy…

Bell brings together a wide range of primary and secondary source material. The most interesting aspect of the book is the many interviews with current and former RBA officials and economic policymakers, from which Bell quotes extensively. Although these interviews necessarily contain a great deal of ex post rationalisation and self-justification they are nonetheless quite candid in their discussion of the history and current framework for Australian monetary policy…..[which] has not benefited from systematic exposition. Bell has made a significant contribution in bringing this material together and making it accessible to a general audience.”


While Bell does canvass and dissect many of the RBA’s shortcomings, such as its serious policy failures in the late 1980s and early 1990s, the history of political interference with monetary policy decision-making through to 1994 (more recently corroborated in Paul Kelly’s book, The March of Patriots), and consistent criticism of the RBA’s governance structures and the effectiveness of its Board by former members such as Adrian Pagan (as I discussed here), he is quite positively disposed to the Bank's approach. Kirchner confirms as much in his own appraisal of the book’s deficiencies:

“Bell concludes that ‘the system does not need much fixing’, which would be music to the ears of the RBA’s deeply conservative senior officers…

While Bell and many others have given the RBA a good press in recent years, this only proves that nothing succeeds like success. Good luck and good management have arguably made up for what the RBA lacks in terms of a sound governance framework. The RBA is certainly distinctive by international standards, but this distinctiveness is little more than a by-product of its history, institutional inertia and political laziness.

Perhaps the most revealing comment in the book comes in the introduction, when Bell says ‘decisions and operations in the upper reaches of the Bank and at the level of the Reserve Bank Board still occur in secret, and it is part of the purpose of this book to peer into this closed world’ …Reform advocates would argue that it should not take a political science professor to make sense of Australian monetary policy.”


In a series of columns over the course of 2009 I sought to highlight key findings from Money Mandarins for the benefit of the lay public in the context of more recent controversies, such as the leaks affair covered by Alan Kohler and the ABC (see here). One can only speculate that the reason the RBA has deliberately chosen to ignore Bell’s otherwise important work is that the (occasionally) less-than-pristine history he documents, which has unresolved reform ramifications to this day, is inconsistent with the sanitised image it is seeking to project. Instead, the RBA has gone out and commissioned its own history, which has been prepared by Selwyn Cornish, an experienced economic historian at the ANU. Yet it is hard to imagine that anyone would consider the RBA’s handpicked historian an acceptable substitute for independent analysis (although I have no doubt that Cornish will make a tremendous contribution to our understanding of the RBA's trajectory). Indeed, this little episode runs the risk of reinforcing the concerns that Kirchner has voiced above.

As a final aside, Paul Kelly’s latest book, The March of Patriots, raises an important historical point about the RBA’s autonomy. The conventional wisdom is that by the early 1990s the RBA was effectively impervious to political influence following the darker days when Treasurer Paul Keating declared that he would not, “abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation first.” Kelly relays that the Governor at the time, Bernie Fraser, recalled:

“I was very disappointed when I heard about [these comments]. It caused enormous problems…It made life much more difficult and made it harder to establish the Bank’s credibility. Paul said he would correct it publicly when he got the opportunity but it never really was withdrawn.”

What is arguably more interesting is that Kelly documents a clear example of direct political interference in the monetary policy setting process as late as mid 1994. The RBA was preparing itself to aggressively raise rates to crush the risk of an incipient inflation outbreak. Yet before the first move Prime Minister Keating summoned the Governor of the Bank and the Treasury Secretary to his official residence. As Kelly tells it:

“Fraser’s recommendation [notably to the PM] was for a full 1 percentage point increase. The meeting was on Keating’s turf. ‘The Prime Minister had concerns,’ [Treasury Secretary] Ted Evans said in a masterly understatement…The Prime Minister wanted a concession. He argued that the increase was too much, too sharp. In the end, they knocked 0.25 per cent off Fraser’s proposal…[Ian] Macfarlane said: ‘I was told they brokered it down to three-quarters of the point’…Keating got a concession.”

What is evident from Kelly’s analysis is that many of the gains the RBA made towards independence and its inflation-targeting framework were largely attributable to Bernie Fraser’s unique working relationship with the strong-willed and at times visionary Treasurer cum Prime Minister. The fact is that the RBA gradually ground out an autonomous approach against Keating’s wishes. Kelly quotes Treasury Secretaries Tony Cole and Ted Evans as concluding that the RBA’s progress during the Keating period was Bernie Fraser’s legacy. Their point was that the advances the RBA made would not have been possible without Fraser’s incomparable influence over Keating, which he had earned from his time as Treasury Secretary.

*In 1930 the Scullin Labor Government sought to further strengthen the central bank’s powers with the Central Bank Bill by divorcing its commercial and central banking activities as was ultimately achieved in 1959. However, the bill was rolled by a non-Labor majority in the Senate underpinned by private bank lobbying.