Could Jim Chalmers have forgotten the history of the Labor Party?
The treasurer says he agrees with all the recommendations of the Reserve Bank’s independent review.
One – the first – is to make the bank truly independent of the government that owns it by removing the power of the board from the treasurer.
At the moment the Reserve Bank of Australia Act makes it clear that in the event of a disagreement between the government and the bank’s board, the government has the right to compel the bank to do its bidding.
To override the board, the treasurer must
submit a recommendation to the Governor-General, and the Governor-General, acting with the advice of the Federal Executive Council, may by decree determine the policy to be followed by the bank
The treasurer is obliged to inform the House of Representatives of his actions within 15 sitting days.
It’s a clause that has never been used, and the review found it unhelpful to say that if an elected government controls monetary policy, it could erode the credibility of the bank’s commitment to low and stable inflation .
But the history of Australia and the Labor Party suggests it’s there for a reason.
Theodore to Gibson
In 1930, Scullin’s Labor government was in office for only two weeks before being hit by the Wall Street crash of 1929 and the onset of the Great Depression.
The Australian government and states had all borrowed heavily from London and faced huge maintenance costs at a time when the prices of Australia’s main exports of wool and wheat were collapsing.
London’s capital markets refused to lend anything else to Australia, and that, along with all the cutbacks from Australian state governments, sent the Australian economy into a free-fall.
Labor treasurer Edward G. Theodore was economically enlightened and believed along with economist John Maynard Keynes that it made sense to use debt-funded public works to deal with unemployment.
Read more: The RBA is much right, but there’s still cause for an investigation
Theodore wanted the Australian Reserve Bank (then called the Commonwealth Bank) to issue Treasury bills to fund public works and help farmers.
In his way was the independent board of the Commonwealth Bank and its austere chairman, Sir Robert Gibson who was a staunch supporter of “sound finances” and was wary of unbalanced budgets.
In April 1931, Gibson wrote to Theodore warning that a point was being reached
above which it would be impossible for the Commonwealth Bank to provide further financial support to the Government in the future
The bank said no to the treasurer.
Theodore replied that Gibson’s attitude
can only be regarded by the Commonwealth Government as an attempt on the part of the Bank to usurp a supremacy over the Government in determining the financial policy of the Commonwealth, a supremacy which, I am sure, has never been considered by the government drafters of the Australian Constitution, and has never been approved by the Australian people.
Gibson would not budge and there was no mechanism to break the impasse.
Finally, Theodore withdrew. his successor, Joseph Chifleywas one of the commissioners of the Royal Commission into the Banking System in 1937.
The RBA has been subordinated for a reason
The commission recommended that in any conflict between the banking council and the government over monetary policy, the government should prevail.
As Prime Minister, Chifley had enshrined the principle in the Commonwealth Bank Act of 1945, and it was later enshrined in the Reserve Bank Act of 1959.
The government’s ultimate supremacy over the Reserve Bank’s governance was won with difficulty – by Labor – and it is easy to imagine that a government should take advantage of that.
Even the knowledge that the trigger is there, never pulled, informs the administration that it is incapable of going completely rogue and going against the wishes of a democratically elected government.
Chalmers should consider whether it is wise to reserve his ultimate power.
One day Chalmers or his successors might wish they had it.
Read more: RBA revolution: how Chalmers will reshape the bank for the 21st century
