money and banking – Chris Berg

A Run on the Banks

A review of Battle of the Banks: How ad men, barristers and bankers ended Ben Chifley’s boldest plan by Bob Crawshaw (Australian Scholarly Publishing, 2025, 242pp). Published in the IPA Review, Spring 2025

What was Ben Chifley thinking when he and his cabinet decided to nationalise Australia’s banks?

The consequences of that decision in August 1947 were monumental. The bank nationalisation legislation passed parliament later that year but was struck down by the High Court in 1948. The proposal almost certainly caused Labor to lose the 1949 election. On the eve of that election Robert Menzies described bank nationalisation as proof that Labor promised “socialism without limit”.

The consequences were as much ideological as political. This episode ground to a halt the economic program that the Labor Party had built up since the Great Depression; one of extensive control of industry and the nationalisation of the commanding heights of the economy.

Nationalisation was in the Labor Party’s DNA. Its ‘socialist objective’—the constitutional object of the party to pursue the “democratic socialisation of industry, production, distribution and exchange”—dates from before Federation.

Bank nationalisation was so fraught politically that it killed the old Labor Party. Twenty-three years after Chifley lost, the Labor Party that returned to power was a very different Labor Party. It was focused on Vietnam and youth and it rejected “the slogans of the 1950s”. Today its socialist objective is a stubborn, and for some in Labor embarrassing, historical artifact.

Bob Crawshaw’s book Battle of the Banks: How ad men, barristers and bankers ended Ben Chifley’s boldest plan is a lively retelling of the story of this attempted bank nationalisation and its consequences.

Crawshaw’s is the second major book published on these events. A. L. May’s The Battle for the Banks was published by Sydney University Press all the way back in 1968, so the story is ripe to revisit. Crawshaw has the advantage of access to many more memoirs, diaries, and the half a century of scholarship that has emerged since May’s publication. It is still a hard ask for Crawshaw because May’s book is a genuine classic of Australian history. But Crawshaw holds his own well, recognising correctly that this is, first and foremost, a narrative of politics and people.

It is hard to beat the symbolism of the bank nationalisation story. The decision was made seemingly out of the blue in a cabinet meeting on a cold Saturday in a quiet Canberra, our bush capital isolated by design from the major Australian population centres and financial hubs. On Wednesday 13 August 1947 the High Court struck down a provision of Labor’s 1945 Banking Act which would have required all Australian governments—local and state—to bank with the government-owned Commonwealth Bank unless the Commonwealth treasurer gave express permission.

Within 24 hours the Chifley cabinet was sitting considering the implications of the High Court decision. On Saturday a short, bare press release was sent around the country, declaring that cabinet had resolved to “prepare legislation … for the nationalisation of banking, other than State banks, with proper protection for shareholders, depositors, borrowers, and staff of private banks”.

News of Canberra’s decision ricocheted around Australia’s populous cities. Crawshaw documents how officers of the private banks learned of this decision through the weekend. The General Manager of the National Bank of Australasia (now NAB), Leslie McConnan, had been golfing that Saturday when he was told of the press release. He finished his game and turned to address the reporters who had rushed to get his take: “If I understand today’s announcement correctly, the objective is that every citizen’s financial affairs will be subject to Government inspection and control”.

By Monday all of Australia’s private banks had met in Melbourne and decided to oppose their nationalisation. This was the launch of one of the most effective private sector political campaigns in Australian history. Plans hatched in Canberra were received very differently by the financial centres of Melbourne and Sydney, and that reception led, ultimately, to the legal and political humiliation of Labor for more than a generation.

It’s a good story and Crawshaw tells it well. His thesis is in the title. Bank nationalisation was defeated by an unprecedented campaign of political resistance by the Liberal Party and the private banks, working with a new generation of advertising and marketing professionals, the conservative print media, think tanks (the Institute of Public Affairs was founded in 1943 and was unsurprisingly focused on the nationalisation debate), and conservative lawyers who chased the government all the way to the Privy Council.

As Crawshaw writes, the story:

… shows how governments can overestimate the openness Australians have for grand ideas, how bold plans need big efforts to communicate them, and that wealthy and threatened institutions always find ways to rally for survival.

I have difficulty with this framing of the story though, no less in Crawshaw’s telling than when A. L. May made the same argument. Both authors agree that the Chifley government was massively outmanoeuvred by its opponents. The bank nationalisation proposal did not exactly come out of nowhere, but the government had not done any of the serious groundwork necessary to support it. Nor did it effectively follow up the proposal.The supporters of private banks were fighting, at least to start, on largely uncontested land. The banks had money, many passionate and loyal staff that did not want to be subsumed into the Commonwealth Bank, and allies across conservative industry.

Memory of the battle of the banks has captured left-wing reformers ever since, who see political resistance to their efforts to tax, regulate, or socialise industry as a rigged game of corporate power almost impossible to win.

But surely we should first acknowledge how profoundly revolutionary the bank nationalisation proposal actually was. It was not simply a ‘grand idea’ or a ‘bold plan’. It was a radical decision made recklessly that would have upended Australia’s economic compact and threatened the country’s prosperity. It was the expression in law of a visceral political hatred for private banks that dated back to the Labor Party’s founding, and an indulgence of crank economic doctrines for the Labor faithful.

Its failure, and the failure of the government that proposed it, need to be understood on their own terms, not just as a marker of poor political tactics or the rise of a new generation of commercial and advertising interests.

Crawshaw is helpful here in outlining what it would have actually meant for the government to take over the vast Australian banking sector. The plans for nationalisation ran to thousands of pages. Each bank was to become a division of the Commonwealth Bank. The employees would help dismantle their banks. They were to hand over everything immediately—share registers, staff lists, information on their accounts. The government would then calculate compensation for the fifty thousand shareholders of the private banking system. There were elaborate carrots and sticks to ensure that everybody cooperated. It was an immense task.

And to what end? The banking sector was not in the middle of a crisis. The Great Depression had long passed, and the wounds from James Scullin’s one-term loss in 1932 should have been long healed.

In fact, the Labor Party had just passed banking legislation. The Banking Act 1945 was itself far reaching, establishing the Commonwealth Bank as a modern central bank with recognisably modern responsibilities for the regulation of the private banking sector. Chifley had told his cabinet at the time that the 1945 Act “did provide for adequate control and could be accepted as a very definite and substantial step in the direction of nationalisation”. It was only the discretionary activation of a provision in the 1945 Act to compel state and local governments to bank with the Commonwealth Bank that was struck down by the High Court in 1947. Other than that, the government’s banking agenda had been realised, and indeed the regulatory structure of the 1945 Act was maintained for decades to come.

By any measure, nationalisation was an extraordinary over-reaction to a minor High Court setback. What was the policy goal, other than to fulfil a long-standing Labor Party ambition? There is little evidence to suggest the public was unhappy with the banking system. The private banks were a core part of the Australian economy. During the Depression Joseph Lyons had called them “the sheet anchor of Australia”.

And bank employees were the archetypal forgotten people of Menzies’ famous broadcasts—middle class and professional. Bankers were hired straight out of school and trained by the banks themselves. Their loyalty to their firms was not surprising, and their reluctance to be thrown into a massively amalgamated Commonwealth Bank was entirely reasonable.

More politically sensitive was what would happen to the private banks’ depositors. The government argued that moving all private deposits to a socialised banking system would provide depositors with more protection than they currently enjoyed. But arguably it was the Commonwealth Bank that was the less sound financial institution.

These days public faith in the solvency of Australian governments is virtually absolute. It was not so absolute in the 1940s. New South Wales under Jack Lang had almost defaulted on its debt. And one of the few banks that failed during the Great Depression was the Government Savings Bank of New South Wales. The Commonwealth Bank declined to take over the GSB because it believed doing so would be indirectly supporting the NSW state budget and that to do so might threaten the Commonwealth Bank’s solvency.

Bank nationalisation did not occur in a vacuum. It does not make sense to look at this policy in isolation as it was not experienced by voters in isolation. Rather, it was one pillar of a vast agenda that Labor had been pursuing in office: nationalisation, the concentration of power in the federal government, and the creation of government monopolies over industry.

There were, in fact, many sectors that the Chifley government wanted to consolidate into a single government monopoly. Before World War II Australia had 16 airlines. War demands and confiscations caused the sector to shrink. Once fighting stopped, the Chifley government tried to establish a single government-owned monopoly in domestic aviation with Trans Australia Airlines (TAA). And in 1947 the government nationalised Qantas as an international carrier alongside British Commonwealth Pacific Airlines—which was itself also majority government owned.

It tried to do the same with broadcasting. FM radio when it was introduced in legislation was to be a monopoly of the Australian Broadcasting Commission, and television, which was yet to come, was also to be a monopoly. A single television monopoly was not a popular idea. A Gallup poll in 1949 found that 78 per cent of the Australian public opposed the idea of an ABC monopoly over this exciting new visual medium.

The post-war priority of the Chifley government was to confirm and extend the controls and powers that it had taken as a temporary wartime measure. Another example was shipping. Merchant ships requisitioned during the war were transferred to the Australian Shipping Board, as the government moved to dominate (although not in this case monopolise) a sector that had been almost entirely private in 1939.

The government made no secret of its intention to consolidate power in itself. The 1944 Fourteen Powers referendum would have given the federal government powers which the Constitution vested in the states, including power over corporations, manufacturing, commodities marketing, and foreign investment. After that referendum failed the government came back in 1946 to ask for power over social services, the marketing of agricultural products, and industrial employment. The social services question passed. The other two failed. Then it came back again in 1948 with a proposal to control rents and prices. This too failed.

It is sometimes granted that the Chifley government overextended itself with this program of socialisation and control, and that the bank nationalisation moment revealed the limits of its reach. Even given the scale of the program I have described, banking was by far the biggest and most consequential sector in the government’s sights.

Australian historians usually characterise our wartime and immediate post-war history as a series of government interventions in the economy born of necessity and a certain expediency, and the Curtin and Chifley governments then sought to consolidate these under the banner of ‘reconstruction’.

But as Stuart Macintyre documented in his book, Australia’s Boldest Experiment, reconstruction in Australia was nothing like reconstruction in the war-ravaged cities of Europe. What was there to ‘reconstruct’? Nugget Coombs, Director-General of Post-War Reconstruction, saw it as an “opportunity to move consciously and intelligently towards a new economic and social system”.

It is possible the citizens of a safe and relatively free Australia, even after the rationing and constraints of the war years, did not share the ideological verve of their government. Certainly, the Menzies era seems to suggest that Australians wished to return to normalcy, not to strive forward with Labor’s social democratic revolution.

But I think there is a more severe critique we might make of the usual narrative. It is not always obvious that the wartime controls imposed on the economy were themselves justified. The federal grab for power was just as opportunistic during the war as after it.

Banking is a useful example. During the Great Depression the Lyons government held a Royal Commission into banking, partly to assuage its rural supporters who were being seduced by its own crank economic theories about how the financial system worked.

The royal commission’s report, released in 1937, recommended private banks remain private but come under the heavy supervision of the Commonwealth Bank, which would be able to control interest rates, product offerings, and require them to hold special accounts with the Commonwealth Bank. (Chifley, for his part, was a Labor representative on the Royal Commission and wrote a dissenting report calling for nationalisation.) But neither the Lyons government nor the first Menzies government took up these recommendations.

The banking controls imposed by the Curtin government in November 1941 were almost exactly the recommendations made by the Royal Commission. The very same controls proposed by the Royal Commission to provide for prudential stability in peacetime were imposed to prevent unseemly profiteering and credit expansion in war. The controls were made permanent in the 1945 Banking Act and left the Australian financial system moribund and repressed until the deregulatory movements four decades later.

We tend not to second-guess regulations that have been imposed during wars—it seems reasonable to give wartime governments the benefit of the doubt, given the scale of the challenges they face. But perhaps historians should. Certainly, if these governments are going to use the existence of wartime regulations to validate post-war regulatory repression.

Bob Crawshaw has done great work revisiting this consequential story for modern readers. The book is relatively sympathetic to the nationalisation cause. The battle of the banks killed the old Labor Party and locked in two decades of conservative government. But readers should always remember the stakes. Australia remained a relatively open commercial and liberal economy. That outcome was not guaranteed.

Age of currency disruption is here

With Sinclair Davidson and Jason Potts

It is unusual for the World Economic Forum’s Davos conference, held every year at the end of January, to be genuinely significant. But it seems this one was. Davos 2020 made clear that we are now living through a monetary reform era comparable to the great monetary events of the twentieth century.

The end of the gold standard, the creation of the Bretton Woods system in 1944, and that system’s collapse in the 1970s all brought about massive, structural economic changes. Our new age – the age of digital money competition – is likely to be just as disruptive.

At Davos the World Economic Forum announced a global consortium for the cross-border governance of digital currencies (including the class of cryptocurrencies stabilised against fiat money known as ‘stablecoins’) and a toolkit for the world’s central banks to establish their own digital central bank currencies.

The details of these Davos initiatives are less important than what they symbolise. Central banks have been experimenting with fully digital currencies for at least half a decade, ever since Bitcoin received its first big waves of press. But their experiments are suddenly urgent, for both commercial and geopolitical reasons.

On the one side, the Facebook-led Libra digital currency project offers a vision of corporate-sponsored non-state private money. On the other side, China is fast-tracking the development of a fully digital yuan, with a barely disguised goal to challenge the American dollar’s domination through technological innovation. Both projects create enormous problems for the rest of the world’s central banks – let alone finance regulators and foreign policy strategists.

Libra has been faced with a concerted hostile attack from central banks and regulators – an attack that begun literally the day it was announced in June last year. Many of the Libra consortium have been pressured into withdrawing from the project.

Mastercard, Stripe and Visa withdrew after they received a letter from US Senators in October declaring that if they stayed in Libra they could “expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities”. The Bank of France chief declared last week that “Currency cannot be private, money is a public good of sovereignty”, and the French finance minister has warned that Libra is not welcome in Europe.

This mafia-like behaviour from American and European regulators is short-sighted – astonishingly so. Whether Libra ends up being a successful global corporate currency or not, it represents a powerful and competitive counterbalance to the Chinese digital yuan.

Details have been dribbling out about the digital yuan since it was revealed in August last year. Its key feature is that it is fully centralised. The People’s Bank of China will have complete visibility over over financial flows, including the ability to control transactions tied to an individual consumer’s identity. This offers China the digital infrastructure for a type of financial repression that is without historical parallel.

And adoption is basically assured. The Chinese government can coerce financial institutions to adopt the digital yuan, if necessary, and can exploit the remarkably strong hold that digital payments like WeChat Pay and AliPay have on Chinese commerce.

Let us hope there are some serious strategists thinking about what happens if this digital currency becomes part of China’s foreign policy toolkit – what the consequences of yuan-isation will be for those countries torn between the Chinese and American spheres of influence.

This is the context in which the many of the world’s central bankers came to Davos to spruik their own digital currencies. More than 50 central banks surveyed by the Bank of International Settlements are working on some form of digital currency, and half a dozen have moved to the pilot project stage. Our Reserve Bank told a Senate committee in January that it too has been secretly working on an all-digital Australian dollar.

And of course in the background to this monetary competition between the corporate sector and the government sector is the slowly growing adoption of fully decentralised cryptocurrencies – the decade-old technology that first sparked these waves of monetary innovation.

The global monetary system of 2020s will be a regulatory and financial contest between these three forms of all-digital money: central bank digital currencies, corporate digital currencies, and cryptocurrencies. The contest has profound significance for the ability for governments to control capital flows across international borders, for financial privacy, for tax collection, and obviously monetary policy.

China has the authoritarian power to force adoption of its central bank digital currency. Countries like Australia do not. So it is not obvious which form of money will eventually dominate.

National governments have had nearly absolute control over national currencies for at least a hundred years, in some cases much longer.

The end of the Bretton Woods system in the 1970s incited a generation of economic reform, as domestic policymakers discovered that Bretton Woods had been propping up all sorts of regulatory controls, trade barriers and even labour restrictions.

We’re about to discover what centuries of state monopoly over money has propped up.

The South Australian Major Bank Levy: Arbitrary, unjustified, and harmful for South Australia and the rest of the country

With Sinclair Davidson

Introduction: In the South Australian state budget 2017-18, South Australian Treasurer Tom Koutsantonis announced that the state government intended to introduce a South Australian Major Bank Levy, one of two revenue measures “to help us meet the cost of our significant support for driving economic growth and creating more jobs”. Treasurer Koutsantonis made clear that this levy was explicitly modelled on the Commonwealth government’s Major Bank Levy, which was announced in the May 2017-18 Commonwealth budget and passed the Commonwealth parliament in June.

Banking is a key sector in a modern economy. Banks and the financial markets they serve work to allocate capital across the economy to its most efficient purpose. The health of the banking sector is closely related to the health of the economy in general; likewise, an unstable and inefficient banking sector often causes, or is at least a leading indicator of, turmoil in the general economy. The centrality of banking and financial markets to economic prosperity and recession throughout history is reason to subject public policy proposals that affect banking markets to particular scrutiny.

This paper is an examination of the South Australian Major Bank Levy. The South Australian Major Bank Levy is intended to exactly replicate the Commonwealth Government’s Major Bank Levy but at the state level. Accordingly, it applies an additional 0.015% tax on South Australia’s share of the total value of bank liabilities that are subject to the Commonwealth Major Bank Levy Act 2017. That levy consists of a tax introduced on a range of liabilities held by the five of Australia’s largest banks – the Commonwealth Bank, the ANZ, the National Australia Bank, Westpac and Macquarie Bank. While these banks are not explicitly named in legislation, they are subject to the levy because they each have total liabilities greater than $100 billion – raising the prospect of new banks being added or of existing banks dropping off the list.

Both levies apply to the total liabilities held by each bank with the exception of that bank’s additional Tier 1 capital, its deposits protected by the Financial Claims Scheme (that is, its government guaranteed deposits), an amount equal to the lesser of the derivative asserts and derivative liabilities of each bank, and its exchange settlement account held with the Reserve Bank of Australia.

This paper finds that the South Australian Major Bank Levy:

will be economically harmful to a state that has seen a rise in unemployment and a decline in business investment,
lacks serious justification in either taxation or banking policy,
represents a rollback of the GST compact of 2000 which required South Australia to remove state taxes on banking and financial services,
harms the stability of banking in South Australia and Australia more generally,
increases ‘regime uncertainty’ for investors, and
there are reasons to believe it has already done harm to the South Australian economy.

Not only should the bank levy be rejected by the South Australian parliament, but parliament needs to work to ensure that markets and investors have certainty that such an arbitrary and harmful intervention could not occur in South Australia in the future.

Available in PDF here.

State Government bank levy makes South Australia riskiest place for investment in Australia

Imagine being an international investor looking at Treasurer Tom Koutsantonis’s Budget. You wouldn’t be interested in his infrastructure spend and “future jobs fund”.

You’d immediately hone in on the fact that the South Australian government has doubled down on the Federal Coalition’s bank levy by introducing its own state bank levy.

And you’d immediately understand that this makes SA the riskiest state to invest in, in a country that is looking like an increasingly risky place to invest.

South Australia has the highest unemployment rate in the nation. It needs firms to put their money into the state and create productive private sector jobs. No government spending can substitute for an attractive economic investment climate.

In this, the state’s bank levy is almost comically bad. The federal bank levy is arbitrary, punitive and unjustifiable. Treasurer Scott Morrison groped around for a rationale for taxing the big banks, finally landing on: people “don’t like you”.

Koutsantonis’s tax is even more arbitrary and its rationale even more slight. In his Budget speech, he said that the “banking sector is very profitable” and that given, in his view, the GST should be applied to financial services, SA should expropriate some of the big banks’ money.

But this is nothing more than a rhetorical shell game. The SA bank levy looks nothing like the GST, developed and refined over nearly two decades to be as efficient as possible. The GST is a consumption tax specifically designed to be paid by consumers.

Koutsantonis says he will ban the banks from passing his tax onto consumers. (This is astonishing by itself – the SA government is going to start regulating banks? We ended state-based financial services regulation 20 years ago.)

Finally, the GST was specifically devised in order to get rid of state-based taxes on financial products. These taxes – the bank account debits (BAD) tax and financial institutions duty (FID) – were uniformly agreed to be inefficient, to disproportionately harm the poor, and to harm Australia’s international competitiveness.

Getting rid of the FID and BAD tax was a key part of the GST deal. Is SA going back on that deal? Is it dipping out of the GST compact? How do Koutsantonis and Premier Jay Weatherill think the other states and Commonwealth, should respond?

With the imminent closure of Holden, SA needs to be looking to grow its economy and attract investors. But if there’s one thing investors hate, it is policy uncertainty.

Policy uncertainty is exactly what Koutsantonis has delivered.

Safety and Soundness: An economic history of prudential bank regulation in Australia, 1893-2008

Abstract: This thesis is an economic history of the prudential regulation of banks in Australia between the crash of 1893 and the global financial crisis (GFC) of 2008. It applies two theoretical frameworks in order to characterise the institutions of prudential regulation and identify the sources of regulatory change over the period studied. The institutional possibility frontier is used to characterise regulatory regimes. Three common models of political economy – public interest, public choice, and ideas – are used to identify the causes of changes in those regimes. The thesis uses unexamined and underused archival sources to refine and expand our understanding of regulatory change in the period studied.

As policymakers in the wake of the GFC conceive of new approaches to prudential regulation of banks, it is important to understand where and how prudential regulation has been adopted in the past. Yet no general study of the history of prudential regulation of banks in Australia exists. This thesis is an attempt to provide that study. Prudential regulation in the period covered has swung between extremes: first, from a laissez faire approach to regulatory control, where regulation was both light and poorly administered, to a system of financial repression, where prudential regulation was both heavy and thorough. As the Australian financial market has been opened to foreign entrants and global competition since the 1980s, prudential regulation has been expanded, formalised, and internationalised. Prudential regulation of banking offers a window into broader changes in the way Australian governments have controlled economic activity.

The thesis makes a number of significant contributions to knowledge. First, it finds that, contrary to later claims by the Reserve Bank of Australia, the Curtin government established a bank deposit guarantee in 1945, and was understood to have done so by the parliament and the Commonwealth Bank, which was to administer the guarantee. Second, it offers a new history of the origins of the deregulation movement in Australia, by situating the Fraser government’s 1979 Campbell committee inquiry into financial regulation in the context of a building society crisis and a contest between two visions of Australia’s economic future. Third, it offers the first account of Australia’s rapid adoption of the international Basel Capital Accords in 1988. Fourth, it provides a new interpretation of the development of prudential regulation after the introduction of foreign banks in 1985, which helps identifies the ideological drivers and economic pressures that led to the (re)creation in 2008 of the Australian bank deposit guarantee scheme by the Rudd government.

The thesis also develops a new theoretical approach to analysing changes in political economy. The ‘subjective political economy’ framework aims to integrate diverse ideological viewpoints and motivations into an institutional model of regulatory control. By characterising institutional choices as a trade-off between subjective costs, the thesis shows how changing ideas about the purposes, possibilities, and risks of prudential control drove regulatory changes. Furthermore, the framework provides a way to understand institutional innovation as changing perceived costs places pressure on the institutional choices available.

The thesis finds that the history of prudential regulation of banking in Australia was driven by changing perceptions of the relationship between the state and the economy and the responsibilities of governments to bank depositors. Australians have long seen the relationship between banking and the state as a window to understand political economy more generally. By bringing the Basel adoption and prudential regulatory changes to the front of any account of the period of financial regulatory reform, we can see how the reform movement of the 1980s was characterised less by ‘deregulation’ and more by regulatory evolution and expansion. A reassessment of the changes in prudential regulation since the crisis of 1893 should inform our understanding of the trajectories and development of Australia’s regulatory state.

Available in PDF here.

The Campbell Committee and the origins of ‘deregulation’ in Australia

Abstract: The 1981 Australian Financial System Inquiry, known as the Campbell Committee, is widely seen as the start of the reform movement of the 1980s and 1990s. Accounts of its origins have been dominated by a debate about which policy actor can take credit. This paper utilises cabinet and Reserve Bank archives to reassess the origins of the Campbell Committee. The inquiry had its origins in an earlier attempt by the Whitlam government to take federal control of the regulation for non-bank financial institutions and the building society crisis of the mid-1970s. In its response to these political and economic challenges we can identify the moment in which the Fraser cabinet turned towards market-based reform. The political decisions made in the context of crisis set the path for regulatory change in subsequent decades, particularly in the area of prudential regulation, where we have seen regulatory consolidation and expansion rather than ‘deregulation’.

Author(s): Chris Berg

Journal: Australian Journal of Political Science

Vol: 51 Issue: 4 Year: 2016

DOI: 10.1080/10361146.2016.1219315

Cite: Berg, Chris. “The Campbell Committee and the Origins of ‘Deregulation’ in Australia.” Australian Journal of Political Science, vol. 51, no. 4, 2016, pp. 711–726.

Why Anti-Bank Populism Is A Fundamental Part Of Australia’s Political Culture

It’s not really a surprise that two-thirds of voters support Labor’s royal commission into banking,as the Fairfax/Ipsos poll found yesterday. Anti-bank populism is a fundamental part of Australia’s political culture.

Back in 2012 Essential asked voters how, specifically, they would like the banks to be controlled. Ninety per cent wanted the government to fix bank fees. Eighty-one per cent wanted the government to fix the salaries of bank CEOs. Seventy-four per cent wanted to forcefully peg interest rates to the Reserve Bank’s monthly interest rate determinations.

It seems likely that voters would welcome a return to the pre-1980s regulatory regime where the government fixed interest rates and micromanaged the products and investments of the banks – where credit was scarce and you had to beg banks for a loan.

So this fortnight’s debate over the royal commission into banks and the government’s alternative – to boost the powers and funding of the Australian Securities and Investment Commission (ASIC) – is not just a minor election year spat.

It’s a revealing window into how the government changed the way it controls business over the last few decades.

The market-oriented reform of the 1980s and 1990s revitalised the Australian economy after the stagflation of the 1970s. But in the wake of that reform grew up a complex regulatory state that pleases no one.

Now control of the economy has been delegated to arms-length independent regulators. They oversee vast regulatory regimes that create uncertainty and impose heavy costs, while at the same time doing nothing to satisfy the anti-corporate populists who imagine that industries like banking have been left up to the “free market”.

We can debate how heavily regulated companies should be, but surely we can agree that the regulation should be transparent.

Take, for instance, the complaint last week in the Sydney Morning Herald by Allan Fels – himself a former regulator – that ASIC has failed to be the “tough cop” on the corporate beat because it has been too eager to sign negotiated settlements with the firms it is supposed to regulate. Fels would rather ASIC take more firms to court.

No doubt many readers nodded in approval, the report further confirming their belief that ASIC is soft and that we need a royal commission.

But the idea that the increasing use of negotiated settlements and so-called “enforceable undertakings” is a sign of regulatory softness is bizarre.

The practice of negotiating enforceable undertakings – essentially promises made by firms to do certain actions which can be enforced in court – was developed to give regulators discretion to be more intrusive, not less.

The idea is this: rather than going to court every time the regulator wants a firm to do something, it can negotiate. Negotiation is cheaper for all involved, but it also gives the regulator more power. With a negotiated settlement, the regulator can persuade firms to do more than the letter of the law would require: do this, and we won’t take you to court.

Enforceable undertakings are a big part of the “responsive regulation” idea that was supposed to strengthen the power of regulatory agencies. ASIC is a big fan of responsive regulation.

Now, in my view, this sort of regulatory practice is bad policy. Firms should know exactly what is lawful and what is unlawful. Regulation shouldn’t be a matter of discretion – it should be clear and unambiguous. Uncertainty is bad for the economy.

But it’s bad politics, too. Recall that old aphorism: not only must justice be done, it must also be seen to be done. Regulatory agencies spend their life negotiating in private with firms rather than publicly enforcing clear rules in court. No wonder voters think those agencies are a bit hopeless.

We can debate how heavily regulated companies should be, but surely we can agree that the regulation should be transparent.

Into that political void has fallen Bill Shorten and his royal commission into banks – an exercise that appears more about adverse publicity rather than a genuine desire for reform.

After all, if Shorten had any grand regulatory dreams for the sector he had ample opportunity to chase them in the three years he spent as Minister for Financial Services and Superannuation.

But it is hard to imagine a royal commission that did not recommend more regulation. They’re structurally designed that way. Lawyers tend to be more sympathetic to legal controls on market transactions than the economists that dominate most other forms of banking inquiry.

The Coalition government has its own policy to strengthen ASIC – with new powers, a new funding model, and some more resources.

None of these options is likely to resolve the deeper problem – that the discretionary, arms-length, ambiguous regulatory state offers nothing but uncertainty to firms and the public.

No wonder voters don’t have confidence in the system. No wonder they like the idea of a populist royal commission.

Kevin Rudd guaranteed bank deposits and gave us something we already had

In October 2008, as credit markets seized up around the world, then-Labor Prime Minister Kevin Rudd and Treasurer Wayne Swan introduced the Australian bank deposit guarantee, to ensure that no depositor in an Australian bank could lose their money. Since at least the 1980s, some academics and many commentators had been calling for such a scheme to prevent bank runs. In 2008, the Rudd government satisfied those demands.

However, my research has found that Australia already had what was believed to be, at least at the time of its introduction, a fully-fledged guarantee of deposits at Australian banks, and has had since 1945.

This deposit guarantee was forgotten, either accidentally or deliberately, by the agency that was intended to implement it – then the Commonwealth Bank, and now the Reserve Bank of Australia – even though the provisions passed in 1945 remain in substance today.

This episode is more than an historical curiosity. It tells us some interesting things about the fallibility of government, the need for careful, clear legislative drafting, and (possibly) the dangers of independent agencies disagreeing with parliament.

The guarantee emerges

Banking was largely unregulated in Australia before the Great Depression. The 1937 Royal Commission on Monetary and Banking Systems was the first time the Commonwealth seriously considered how the government ought to respond if a bank failed under its watch.

The Royal Commission recommended that illiquid or insolvent banks ought to be taken over by the Commonwealth Bank, which was being reconstituted as a warts-and-all central bank. If the bank was merely illiquid, then the Commonwealth Bank should try to revive it. One possible action might be to temporarily guarantee the stricken bank’s deposits. But if the bank was truly insolvent, the Royal Commission recommended it then be liquidated and the Commonwealth Bank ought to “announce its estimate of the amount which the depositors may expect to receive”.

In 1938 the conservative Lyons government translated this recommendation faithfully into legislation, however political turmoil prevented the bill from passing. The Curtin government introduced banking controls through national security regulation in 1941, although did not immediately consider the question of failed banks. Concerned these regulations would expire at the end of the war, John Curtin and his Treasurer Ben Chifley turned their mind to a new Banking Act at the end of 1944.

It is clear from cabinet papers and the Commonwealth Bank’s archives that the Curtin government had a drastically different idea of the government’s responsibility to depositors. Advocates for the new Banking Bill in cabinet told the assembled ministers that the government would offer depositors a “guarantee against loss which would be incorporated into the Banking Act”.

The cabinet debated the consequences of this guarantee – including how it might undermine the competitive advantage of the Commonwealth Bank’s deposit services – but finally agreed that “the depositors shall be guaranteed the security of their deposits”.

This shocked Commonwealth Bank officials, who, when informed of the Curtin government’s intention in late January 1945, realised that if they took over a bank whose assets were less than its liabilities, it might have to backstop depositors’ funds out of its own pocket. The post-war regulatory apparatus of prudential supervision – the system of inspections and controls over private banks – came from the demands of the Commonwealth Bank in response to its new responsibility for depositors’ funds.

Yet in practice the legislation was deeply ambiguous as to the Commonwealth Bank’s responsibility for deposits in failed banks. The only difference between the Lyons government legislation and the Curtin government’s legislation was the heading of the provision and marginal notes, which changed from “provisions with respect to Banks unable to meet their obligations” to “protection of depositors”, and from “supply of information” to “Commonwealth Bank to safeguard depositors”.

Nevertheless Labor members claimed throughout the parliamentary debate over the Banking Bill that it offered “real and an effective guarantee of the safety of bank deposits”. Cabinet, the Commonwealth Bank, and parliament believed that it had introduced a deposit guarantee in 1945.

The guarantee disappears

Indeed, the idea that the Curtin government had guaranteed the banks remained Labor lore for decades. In 1973, Gough Whitlam told parliament:

“No bank registered under Australian Parliament legislation can go bankrupt. In return for that guarantee against loss, banks pursue a lending policy which the government of the day approves”.

The relevant provision in the Banking Act did not change, yet by the mid-1980s the Reserve Bank was explicitly denying any deposit guarantee existed.

So what happened? The Commonwealth Bank might have just forgotten about the guarantee. Central banks are human institutions, and to be fair the legislation on the page is deeply ambiguous. A more concerning explanation is that the Commonwealth Bank might have deliberately forgotten about the guarantee – contrary to the intention of parliament – given how unhappy it was with its introduction.

Until the global financial crisis, academics and commentators used to bemoan the stubborn belief held by the public that bank deposits were guaranteed by the government, apparently contrary to Australian law.

But rather than demonstrating the ignorance of the public, the story of the 1945 deposit guarantee reveals more the fallibility of government, as the Commonwealth government either accidentally or intentionally forgot its own policy.

The Curtin–Chifley Origins of the Australian Bank Deposit Guarantee

Abstract: In 2008, the Australian government introduced a guarantee of bank deposits. However, in 1945 the Curtin–Chifley government had already introduced what it believed was an explicit bank deposit guarantee. Using archival material, this paper shows how it was understood to be a guarantee by the cabinet, Labor parliamentarians, and the Commonwealth Bank. The guarantee was an important yet almost entirely forgotten part of the Curtin–Chifley government’s social reform program. This paper uncovers the origins of the perception of a deposit guarantee in this forgotten 1945 debate, the attempts by policymakers and the Commonwealth Bank to roll back those perceptions in subsequent decades, and the Rudd government’s reversion to an explicit guarantee scheme in 2008.

Author(s): Chris Berg

Journal: Agenda

Vol: 22 Issue: 1 Year: 2015

DOI: Link

Cite: Berg, Chris. “The Curtin–Chifley Origins of the Australian Bank Deposit Guarantee.” Agenda, vol. 22, no. 1, 2015, pp. 21–43.

Why Politicians Ride The Wave Of Anti-Bank Populism

Australia’s banks are launching a new campaign to educate policymakers and regulators about the ins and outs of their business, the Australian Financial Review reported on Monday.

The banks feel defensive since the debate over the Future of Financial Advice (FOFA) reforms, in which they were depicted as semi-corrupt fraudsters preying on the elderly and uninformed, and the recent outrage over mortgage interest rate rises.

Good luck to them. This seems a more productive use of their public relations dollar than campaigns on climate change.

But if this campaign breaks the deep connection between Australian politics and anti-bank populism, it will be the first to do so in 12 decades.

The banking crisis of 1893 set in train more than a century of populist political demagoguery about banking.

Our modern Labor mythologists sometimes skip over the comically propagandistic “money power” doctrine that formed such a large part of Labor politics in the first half of the 20th century. According to money power ideologists, a cabal of bankers – British bankers, Jewish bankers – owned every major industry and asset and controlled Australian politics.

The money power doctrine was not an obscure theory held only at the margins of Australian politics.

Jack Lang, the former NSW premier and Paul Keating’s mentor, was a money power conspiracy theorist.

John Curtin’s mentor, the Scullin government minister Frank Anstey, was the author of an anti-banking, anti-Semitic book called the Kingdom of Shylock (have a look at the digitised version, if you want to be stunned at how overtly racist Australian labour thought it could be).

Driven by this sort of thinking, in 1945 Curtin government introduced burdensome and harmful regulatory controls on Australian banking that slowed economic development and pushed ordinary borrowers into the shadow banking sector for decades.

While it is true that some economists excited by the possibilities of the new Keynesian economic thinking had urged Labor to introduce banking restrictions, it was the crude money power populism that led to the most harmful of those controls: caps on interest rates and an outright ban on foreign banks in Australia.

Anti-bank hostility even played a role in the deregulation of banking four decades later. When Keating ended the ban on foreign banks in 1985, he did so because he believed it would undercut the “drones” of the Australian banking industry. The banks had been made lazy and powerful because of the protection his Labor predecessors had granted to them.

When the Reserve Bank decided to break the back of inflation in the early 1990s, exacerbating on one of the worst economic downturns in Australian history, Keating directed popular anger towards the banks.

A 1991 inquiry into banks – A Pocket Full of Change – encouraged people to send in their complaints with bank services, interest rates, customer relations. Anything they could think of. Nearly a 1000 submissions and complaints were sent in. This distracted attention from the government decisions that caused the crisis in the first place.

A Pocket Full of Change is largely forgotten now. But in retrospect it was very significant.

Our semi-regular freak-out about whether banks are adequately passing on Reserve Bank interest rate cuts can be traced back to Keating’s decision to recast old money power rhetoric in a new guise: to present banks and bankers as uniquely profit hungry and exploitative, and to do so as cover for government policy.

Hence the recent kerfuffle about the major banks’ decision to increase mortgage rates independent of the Reserve Bank.

The Reserve Bank’s cash rate has been held steady at 2 per cent since May 2015. But in October the big four banks decided to increase the interest rates they charged on variable mortgages. Westpac went first, and the rest followed. Bill Shorten thinks that this increase was “just corporate greed”.

But the rate increases are explicitly in response to a policy decision by the Australian Prudential Regulatory Authority that the banks should hold more capital against mortgages. Of course the banks were going to pass the cost of that regulatory requirement onto consumers.

Have the banks raised rates more than they need to, as Scott Morrison tried to argue? Given thelikelihood of even more stringent capital requirements in the near future, it’s hard to blame the banks for being cautious.

In the debate over the FOFA reforms much was made of the need to protect uninformed investors from predatory financial advisors. It’s true that many people don’t understand the world of finance and banking.

But this doesn’t just make them vulnerable to unscrupulous financiers. It also makes them vulnerable to unscrupulous politicians who want to obscure the consequences of their own policy decisions.

If the banks want to change that dynamic, they’re going to have to shift the weight of a century of Australian history.