Australian Central Banking

Union Bank Australia 1848

Australia has a long tradition of central banking. Is this a good approach? Is it Biblical? What should Christians think?

The Reserve Bank of Australia (RBA) is our nation's central bank. It is important to understand how it operates. It is important to place the Reserve Bank of Australia (RBA) in its historical economic context. This brief look at the history of Australian economics is not extensive. Due to space limitations, I will paint, with broad strokes, some of the major themes from 1788 through the formation of the RBA.

In his work, Foundations of the Australian Monetary System, S J Butlin comments that; “Australian economic history is the major part of all Australian history; from the beginning economic factors have dominated development in a way that should gladden the heart of any Marxist.”[1] However, Butlin continued to highlight that the monetary system in Australia continued to change “its structure and technique in consonance with the developing structure of the immature Australian capitalism…[So that by] the eve of the discovery of gold in 1851, Australia was fully organized as a capitalist community on the British model.”[2]

The origins of the Australian economy were dominated by the intention of the British to establish a penal colony. This is the context of what our economy grew out of. Officers and officials were granted monopolies in the means of trade and production through Commonwealth land grants, assigned convict labour, opportunities to sell produce back to the government to feed convicts (etc). However, it must be noted that these monopolies were created out of necessity. The requirements were for the recipients to be free, at the outset. As time produced emancipists trade opportunities were extended to them.

It is also interesting to note that when “necessity dictated arrangements for…some other mode of organizing food supply than turning convicts into peasants, the growth of private enterprise was rarely restricted, usually permitted, and often promoted. Capitalist solutions…were accepted by harassed governors of a British government embroiled in continental war without any consideration of the way they implied the emergence of a private enterprise economy which could only briefly be consistent with a gaol.”[3] Early Australian monetary arrangements patterned after the larger economic pattern of a gaol depending upon private enterprise for its food supply.

Commissariat Store

Australian Commissariat Store

At the heart of the initial development of the 19th century, “Australian economy” was the Commissariat Store. This Store:

  1. Produced a Treasury bill (its Store receipt) for all public and private payments. This receipt could be regularly withdrawn for bills of exchange with the British Treasury.
  2. Issued loans in kind through advances in stock, equipment and rations.

Most private transactions were fulfilled via barter and numerous privately issued notes. Thus at this stage in history, a dual monetary system existed. “Sterling” referred to any form of money that was roughly equivalent, in value and acceptability, to bills on the Treasury. “Currency” referred to all forms of purely locally accepted money, which was usually heavily discounted in terms of “sterling.”

Ln Governor Lachlan macquarieThe second stage of the Australian economy concurred roughly with Governor Macquarie (1810-1821). In this stage of history our destiny to be a free capitalist society, not a goal, was established. To this end, Macquarie promoted the interests of the emancipists. He sought to establish a Government bank in Australia, which England firmly disapproved. Macquarie also sought to regulate, suppress or replace the disreputable private note issuers through seeking them to be issued in terms of “sterling.” Through (Macquarie’s) creation of the Bank of New South Wales, “the creation of a Legislative Council in 1823…; trial by jury, freedom of the press; large free immigration; the emergence of a coherent organized opposition to the local government…marked the decline of the goal as the primary purpose of British settlement…Events [were moving] rapidly in the erection of a free society and a free economy.”[4]

ThomasbrisbaneThere were three major monetary developments between 1822 and 1830: 1. Under Governor Brisbane (1822) there was an attempt to establish the Spanish dollar as legal tenure and circulating coinage. 2. The British general monetary policy of a sterling-exchange standard was imposed upon all of the colonies in 1825. The full extent of this policy was protracted, especially in Tasmania and the Australian Pound was later born. 3. From 1822 to 1829 small exclusive partnership banks (NSW: Waterloo Company – 1822, Bank of Australia – 1826; TAS: Bank of Van Diemen’s Land – 1823, Tasmanian Bank – 1826, Derwent and Cornwall Banks – 1828 and the Commercial Bank – 1829). All of these banks issued notes and after the depression of 1830 private note-issuing reduced and a decade-long pastoral boom proceeded. As men explored NSW the demand for labour increased substantially. Schemes for assisted immigration were created and then funded via Crown land sales. Tasmania did not experience this great boom but rather mild ups and downs. This decade saw the Australian banking transformed. A number of large colonial (English) banks emerged and engaged in aggressive competition for deposits. After all of this expansion of money and credit the slump of 1841 to 1843 occurred. Australians learnt, first hand, the impact of bank failure through the collapse of the Port Phillip Bank, the Sydney Bank and the Bank of Australia.

It is important to note that during this time (1788-1851) banks adhered to a reserve ratio of at least 30%. In 1846 the Sydney Herald applied what became known as “the Bank test” to banks’ quarterly statements. In their opinion banks with a reserve ratio of more than one-third were “sound.”[5]

Federation – 1901

Opening of the first parliament

“In 1911 (a decade after the Australian Colonies federated), Andrew Fisher’s Labor Government decided to establish a government bank for the newly formed nation.”[6] The Commonwealth Bank Act 1911 established our first central bank, the Commonwealth Bank of Australia (“the bank”). Sir Denison Miller, the first Governor, headed twelve staff when the bank opened for business on 15 July 1912. The bank facilitated savings and general (trading) bank business that was backed by a Federal Government Guarantee. No other bank had this type of guarantee. The bank’s savings facilities were operated from its only branch ion Melbourne (317 Collins Street) and via 489 agencies located within post offices across Victoria. Within a year of establishment capital city branches were opened across Australia. Mergers with Tasmanian (1912), Queensland (1920), Western Australia (1931) and New South Wales (1931) state banks expanded the bank’s infrastructure and client base. The bank was one of the key agencies used by the Australian federal government to organise, amongst other things, war loans in World War 1. In 1916 the bank moved to the corner of Pitt Street and Martin Place in Sydney.[7]

Responsibility for the issuing of notes was transferred from the Commonwealth Treasury to the bank in 1920 and the bank’s role/authority as the nation’s central bank expanded over the following two decades. In the Second World War, the bank again acted as an agent for the federal government and a banker for allied personnel across the war zones. Post the Second Great War the bank was involved with central banking functions, private banking facilities (e.g. savings facilities, home loans which were originally termed ‘Credit Foncier’ loans, were first offered in 1946) and activities such as housing construction/industrial development.

The Reserve Bank of Australia

Reserve Bank Australia

The controversy around an obvious conflict of interest in the bank’s central planning and trading/savings endeavours was resolved by the creation of the Commonwealth Banks Acts 1959 and the Reserve Bank Act 1959 (“the act”). The RBA was granted the country’s central banking functions[8] in 1960 and the Commonwealth Banking Corporation continued trading/savings bank activities.[9] The Commonwealth Bank was transformed from a statutory authority to a private bank through the Commonwealth Banks Restructuring Act 1990. This transformation occurred over the period of 1991 to July 1996.[10]

The act granted the RBA the following powers:

“(a) to receive money on deposit; (b) to borrow money; (c) to lend money; (d) to buy, sell, discount and rediscount bills of exchange, promissory notes and treasury bills; (e) to buy and sell securities issued by the Commonwealth and other securities; (f) to buy, sell and otherwise deal in foreign currency, specie, gold and other precious metals; (g) to establish credits and give guarantees; (h) to issue bills and drafts and effect transfers of money; (i) to underwrite loans; and (j) to do anything incidental to any of its powers.”[11]

As the central bank, the RBA was granted a monopoly of Australia’s monetary policy and payments system. The RBA was granted the sovereign and sole authority to create bank notes for legal tender in the land. No other banking institution or individual or state has the authority to create and issue bills or notes for the payments of money payable to bearer.[12]

The RBA is overseen by two boards, the RBA Board and the Payments System Board. The RBA Board is responsible for all monetary and other associated policy, except the RBA’s payments system policy.[13] This overview concentrates on the RBA Board.

Can the Federal Government challenge/change the RBA Board’s policies?

Most would answer with an emphatic no! The RBA is independent of the federal government, or is it? In this author’s opinion, the RBA operates, via its Boards, in an interdependent and somewhat subordinate manner to the Federal Government of Australia (“government”). The author comes to this position with the facts that:

  1. The RBA Board consists of a Governor, Deputy Governor (both appointed by the Treasurer with a tenure of no longer than 7 years, but they can be re-appointed), the Secretary to the Department of Treasury and 6 other members who are nominated by the Treasurer.[14]
  2. The Boards present their monetary and banking policy to the government from “time to time.”
  3. In the event of a difference in opinion between the RBA Board and the government over whether a policy is “to the greatest advantage of the people of Australia, the Treasurer and the relevant Board shall endeavour to reach agreement.”[15] If no agreement can be reached Treasury will “submit a recommendation to the Governor General, and the Governor General, acting with the advice of the Federal Executive Council, may, by order, determine the policy to be adopted by the Bank.”[16] The government takes responsibility for the order. The relevant RBA Board shall ensure that the order is administered through the RBA’s system appropriately, while the order remains in operation. The Treasurer ensures that the order is laid before each House of the Parliament.

RBA and monetary policy…how does it work?

First, let’s understand what monetary policy is. John Sloman and Keith Norris instruct that in the Australian context, “monetary policy is the deliberate attempt by the Reserve Bank to influence the supply of money and the level of interest.”[17] They continue; “thus, the objective of monetary policy is price stability. The instruments used to achieve this objective are interest rates and the supply of money and credit…To make interest rate changes effective…the Reserve Bank has to change the quantity of money.”[18] Market operations are the tools the RBA uses to bring about desired monetary outcomes. These market operations are the “purchase or sale of government securities by the Reserve Bank to…change…the official cash rate.”[19]

The keystone of the RBA’s monetary policy is inflation. This term has been redefined since John Maynard Keynes’ economic theories of the early 20th century. Keynesianism and now most mainstream economic schools define inflation as the increase of prices over time. This is a “clever” means of diverting public attention away from the cause of inflation. The “original definition…[was] a rise and fall in the quantity of money. Unfortunately, the mainstream definition, by focusing on prices, obscures the fact that it is changes in the money supply that often cause changes to prices.”[20]

The cash rate

How does the RBA tighten or weaken monetary policy through the cash rate? [21]

The RBA’s Domestic Markets Department seeks to maintain/manipulate the monetary market conditions to ensure the cash rate at or near the target set by the RBA Board.

Cash rate = the rate charged on overnight loans between financial intermediaries. “The cash rate is determined in the money market as a result of the interaction of demand for and supply of overnight funds.”

The RBA has the authority and legislated ability to influence the cash rate. This “power” stems from its monopolist control over the supply of funds available to banks for settlement transactions. These are known as exchange settlement funds, which are held by the banks within their accounts at the RBA.

An increase in the supply of exchange settlement funds results in an increase in monetary supply in the cash market. Due to basic demand and supply mechanisms this action tends to decrease interest rates, i.e. because more money is available in the system each unit is cheaper. The opposite occurs when the RBA tightens the amount of settlement funds available.

The cash rate has significant influence over all other Australian market interest rates and is a fundamental rate upon which “the structure of interest rates in the economy is built.”

Government securities, mortgage-backed securities & the increase in money supply


In order to fully fund any budget deficit, the federal government issues securities to the private sector at market interest rates. This is achieved through an arrangement between the RBA and Treasury[22] (in particular through the Australian Office of Financial Management – AOFM, which is the specialist government debt management agency).

Through the AOFM the federal government issues Commonwealth Government Securities in the form of:

1. Treasury Bonds = medium to long-term debt securities that carry an annual rate of interest fixed over the life of the security, payable six monthly. 2. Treasury Indexed Bonds = medium to long-term securities for which the capital value of the security is adjusted for movements in the Consumer Price Index (CPI). Interest is paid quarterly, at a fixed rate, on the adjusted capital value. At maturity, investors receive the adjusted capital value of the security – the value adjusted for movement in the CPI over the life of the bond. 3. Treasury Notes = short-term debt security issued to assist with the Australian Government's within-year financing task.[23]

The federal government maintains a number of RBA accounts called the Official Public Account (OPA). The OPA is actively managed by the AOFM to ensure the federal government can meet its financial obligations. Cash not required immediately is invested with RBA term deposits or other money market investments. Short term funding is achieved through increasing Treasury Notes on issue or redeeming term deposits or investments. The RBA also provides the federal government an overdraft facility for temporary shortfalls resulting from unexpected events.[24]

On the 26th September 2008 Australia’s Treasurer, Wayne Swan, directed the AOFM to purchase Australian AAA-rated residential mortgage-backed securities (RMBS). Mr Swan explained that; “This is a temporary initiative that responds to highly unusual conditions in international capital markets and their impact on Australia's mortgage lending market. I expect that the RMBS purchased by the AOFM will be held until redeemed or sold into secondary markets as and when market conditions normalise.”[25] The Treasurer directed the AOFM to invest up to $16 billion on 3 October 2008, 16 October 2008 and 30 November 2009. On the 5th April 2001, the Treasurer directed the AOFM to increase its purchase of RMBSs by $4 billion and purchase the $3.463 billion of his previous directions. Mr Swan explains that “the Australian RMBS market remains dislocated and continues to be affected by the fallout from the global financial crisis.”[26] This government intervention, via injection of funding, is targeted at non-bank lenders.

The current (6/12/11) total Commonwealth Government Securities on Issue is $221 billion. This debt doubled the $101 billion 2009 level.

All of these government activities effectively increase the money supply via the RBA trading in government securities. “To reduce the cash rate it purchases government securities from banks and other financial institutions. It pays by cheque (drawn on itself) and thus the cash reserves of these institutions rise and they are able to increase the volume of loans they make: that is, they create deposits…The money supply increases.” The opposite is done to effectively increase the cash rate. [27] This increase in money supply is exponential due to Australia’s fractional reserve banking policies.

Monetary Policy Objectives

All of the above measures are taken by the RBA Board to meet its legislated objectives:

“(a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia.”[28]

Fractional reserve banking

Fractional Reserve Banking

In 1920 Australia produced its first currency note. The responsibility to issue currency notes was given to the Australian Notes Board,[29] although this board was independent of the Commonwealth Bank, the Bank’s Note Issue Department undertook the task of issuing notes.[30] All notes were printed with the “promise to pay by the Treasurer …’in gold coin on demand at the head office of the Commonwealth Bank of Australia.’”[31] Between 1870 and 1914 currencies were “fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade; however, with the start of World War I, the gold standard was abandoned.”[32] This was done progressively across the world. Chiefly the removal of the gold standard was accomplished at Bretton Woods. The International Monetary Fund (IMF) was established to basically replace a fixed currency arrangement.

As indicated above Australian banks have had the capacity to loan out more than deposits received. The historical (prior to 21st century) reserve ratio was 30%. This allowed banks to increase monetary circulation via note issuance. This activity was limited by the reputation of each bank, the size of the bank, the promise to redeem bills/notes in gold and various other factors. The advent of the central bank changed things. Monetary supply was henceforth monopolised by the Australian Federal Government. Current Australian bank reserve ratios are around 5% and credit unions around 15%. There is no set, legislated reserve ratio, however, the types of assets that count towards the reserve are legislated (see this article:

What is fractional reserve banking?

“In 1929, as an emergency measure during the Great Depression, Australia left the gold standard.”[33]This changed the Australian banking world. “The gold standard forced responsibility on the politicians. When the government is legally obliged to turn over a specific amount of gold to anyone who turns in paper dollars, it can’t run the printing press willy-nilly. On the other hand, with fiat money the only costs of printing more dollars are the materials used in the process. As any private counterfeiter can attest, it’s definitely a profitable venture to buy ink and paper and use it to print crisp $100 bills.”[34] Banks moved away from their two distinct functions of being “warehouses…[and acting] as credit intermediaries, or middlemen between lenders and borrowers. Because of our current fractional reserve system, in which banks can lend out more money than they have on deposit in the vaults, the line between the two functions”[35] blurred.

Fractional reserve banking occurs within Australia. Banks do not need to maintain a 100% reserve. The problem here is that for us to return to a 100% reserve, bank customers will not receive interest on deposit or check accounts. There would need to be a distinction between accounts for deposit that can be loaned to others and accounts for mere transactional purposes, which are held 100% in reserve. There would be an associated fee for the 100% reserve account as the banks would not make any profit on merely warehousing this money.

How does fractional reserving work?

Through this system, Australian citizens are not given access to true money warehouse facilities, i.e. gold-backed paper money. Citizens cannot take their paper/coins to the RBA and exchange them for gold (or silver). This has reduced the banks’ risk of a bank run (i.e. depositors trying to withdraw their funds together). The problem here is that the risk of a bank run actually self-regulated banks prior to the introduction of central banks. In order to be profitable and not go bankrupt, the bankers would hold sufficient reserves.

Fractional reserve banking creates money in the Australian system in this way:

“Say that you take in $100 cash and deposit it in your bank. The central bank…[the RBA]…requires banks to keep varying percentages of money on reserve…[in their RBA accounts]….A 10% reserve makes it easy to compute, though for many accounts it’s under 5%. The bank takes your $100 and issues you a receipt (bank deposit slip) for $100. It then takes $10 and [deposits it into its account with the RBA]. Then it loans out the remaining $90. The guy who borrows the $90 deposits it into his account. Presumably, he then writes a check for the $90. The person who gets his check deposits it. His banker takes 10%, or $9, and [deposits it into his bank’s account with the RBA]. Then he loans out the remaining $81. The borrower writes a check to someone who deposits it in his bank. His banker takes 10%, or $8.10, [deposits it into his bank’s account with the RBA], and loans out $72.90. And so it goes, from bank to bank, merrily multiplying. In theory, that original $100 cash deposit (or check) creates an additional $800 in loaned money, plus your original $100. And you wonder why we have inflation? Isn’t legalized counterfeiting wonderful? Something for nothing. We’ll all be rich soon. Millionaires.”[36] Bread will cost $1,000 a loaf!

Increasing money

The government guinea pig can run a number of money increasing/decreasing infrastructural treadmills in Australia:

  1. The AOFM buying/selling government securities;
  2. RBA increasing/decreasing overnight exchange settlement funds to effect interest rates;
  3. Allowing banks to operate a fractional reserve policy.

I will offer some suggestions on how we can reconstruct banking and finance in a later article. This will answer is the system Biblical.

Recommended reading

Christian Economics In One Lesson

Biblical Economics

God Versus Socialism article and the book

Biblical Economics 101

End notes

[1] Butlin, S J (1910-1977), 2002, Foundations of the Australian Monetary System 1788-1851, University of Sydney Library, Sydney Australia, p. 1. This book can be downloaded free here:

[2] Ibid, p.1.

[3] Ibid, p. 3.

[4] Ibid, p.6.

[5] Ibid., pp. 511-512.

[6] Information gleaned on 5/12/11 from:

[7] Information gleaned on 5/12/11 from:

[8] Reserve Bank Act 1959, Section 26. Reserve Bank to act as a central bank.

[9] Information gleaned on 5/12/11 from:

[10] Information gleaned on 5/12/11 from:

[11] Reserve Bank Act 1959, Section 8, General Powers.

[12] Reserve Bank Act 1959, Sections (34) (36) (44)

[13] Reserve Bank Act 1959, Section 8A, The Boards of the Bank.

[14] Reserve Bank Act 1959, Section 14 (1). Membership of Reserve Bank Board. Section 24 (1) Governor and Deputy Governor.

[15] Reserve Bank Act 1959, Section 11 (2)(3). Differences of opinions with Government on questions of policy.

[16] Reserve Bank Act 1959, Section 11 (4). Differences of opinions with Government on questions of policy.

[17] Sloman J, Norris K, 2008, Principles of Economics, 2nd edition, Pearson Education Australia, Frenchs Forest, p. 305.

[18] Ibid., p. 305.

[19] Ibid., p. 305.

[20] Davidson, L F, The Causes of Price Inflation & Deflation: Fundamental Economic Principles the Deflationists have ignored, Libertarian Papers, Vol. 3, Art. No. 13, 2011. Cited 5/12/11 here:

[21] All quotes and information gleaned in this section are from: Reserve Bank of Australia website, About Monetary Policy, viewed 5/12/11 here:

[22] Reserve Bank of Australia website, About Monetary Policy, viewed 5/12/11 here:

[23] Australian Office of Financial Management website, Debt Issuance, viewed 5/12/11 here:

[24] Australian Office of Financial Management website, Cash Management, viewed 5/12/11 here:

[25] Swan, W, 2008, Government Initiative to support competition in mortgage market, media release, 26 September, Deputy Prime Minister and Treasurer, Canberra. Viewed 6/12/11

[26] Sawn, W, 2011, Direction on investment in Residential Mortgage-Backed Securities 2011, 5 April, Australian Office of Financial Management, Canberra. Viewed 6/12/11

[27] Op cit., Sloman J, Norris K, p. 306.

[28] Reserve Bank Act 1959, Section 10. Functions of Reserve Bank Board.

[29] Museum of Australian Currency Notes website, Timeline: 1901-1920, viewed 6/12/11 here:

[30] Museum of Australian Currency Notes website, The Commonwealth Bank and the Note Issue: 1920-1960, viewed 6/12/11 here:

[31] The Arges (Thursday, 9 June 1932, page 6), as cited on: website, Currency notes promise to pay inscription to be altered, viewed 6/12/11 here:

[32] Investopedia, (5 June 2009), Currency Exchange: Floating Rate Vs. Fixed Rate, viewed 6/12/11 here:

[33] “Australian Pound,” Wikipedia online, viewed 6/12/11 here:

[34] Murphy, R P, 2007, The Politically Correct Guide™ to Capitalism, Regnery Publishing Inc., Washington, p. 91.

[35] Ibid., pp. 92-93.

[36] North, G, 1986, Honest Money – The Principles of Money and Banking, Christian Liberty Press, Arlington Heights, p. 92.

[37] Charles Spurgeon, as cited on: McCallum, T, The Government can – tax trees, Anselm Study House website, viewed 6/12/11 here:

[38] Marx, K, Engels, F, 1848, Manifesto of the Communist Party, viewed on 6/12/11 here:


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