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."

Sunday, October 17, 2010

Selwyn Cornish's history of Australian central banking

So I am reading Selwyn Cornish's history of central banking in Australia, which was published last year. I am guessing this might be a bit dull for most people. But since I am interested in the area, I have to say I find it pretty easy going. Having said that, I have two gripes, which I have shot to Vanessa Crowe, the RBA's communications manager.

First, it would be helpful if the book was published in greater than size 8 font. The text is incredibly small--and I have 20:20 vision. I am not sure why this decision was made (costs?), and have sympathised with all the grey heads inside the RBA who struggle with the text.

Second, it would be nice if you could buy the book on and then read it on your Kindle or iPad. It has been quite some while since I have had to lumber a real book around (think of the propaganda value of all those university students and school kids who could have instant electronic access to this!). We shall see how objective Cornish is on the RBA--this work was commissioned by them. If you are interested in a very dispassionate historical analysis, I would strongly recommend Professor Stephen Bell's outstanding book, Money Mandarins.

Notwithstanding the above, there are many nuggets in this work. One, pun intended, I will quickly quote here is from H.C. ('nugget') Coombs, who was the RBA's first official governor.

As I have explained before, central banking in Australia dates back to 1911, but the separation of central banking and commercial banking functions of the old Commonwealth Bank of Australia was effected by the 1959 legislation.

In the quote that follows, Coombs is talking about the RBA's legislated goals of (1) price stability, (2) full employment, and (3) to contribute to the 'economic prosperity and welfare of the people of Australia'.

I have written a lot about the well-known conflicts between (1) and (2), and the primacy of (1) established in the 1990s, and formally enshrined by the 'Statement' signed between the Governor and the Treasurer, which Bernie Fraser has said he thought was bad idea (since it subjugated the focus on full employment).

For those who missed all of this, the RBA correctly argues that by concentrating exclusively on price stability and low inflation it can over time fulfil its obligations to (2) and (3). But they believe that (1) needs to be the first-order focus, and not conflicted by (2). Of course, all of this ties into the RBA's empirical belief in the integrity of the Phillips Curve.

Anyhow, this is what Coombs had to say as to how these three objectives developed via the original 1945 Commonwealth Bank Act (note how the conflict between price stability and employment existed over 50yrs ago):

"From the Keynesian stronghold of the Ministry of Post-War Reconstruction, I and my colleagues were urging that the Bank legislation should record the commitment of the objective of Full Employment. Treasury and the Bank argued that the concern of the Bank was essentially financial and that its primary objectives should be the stability of the value of the currency [read prices] in both its domestic and international contexts. In the event it was finally agreed that there was no profit to be gained from exploring legislatively the compatibility of these objectives or the nature of the trade-offs between them which might be required.

Accordingly, with varying degrees and styles of reluctance, we all accepted a 'Charter' for the Bank which committed it to both, balanced by a third which was so imprecise that could be welcomed equally by those who saw the Bank as the instrument of the populist vision of 'The People's Bank' correcting the inherent inequalities of the capitalist system, and those who say the interests of all being best served by the separate pursuit of their individual interests."