It is time to have a closer look at the Reserve Bank of Australia “RBA” as any serious reform of the role of the private banks in the Australian monetary system must involve reform of the role of the Central Bank (i.e. RBA) in that monetary system. Reform of Australia’s monetary system involves expanding the role of the RBA in a very specific but limited way.
What is the current role of the Reserve Bank of Australia and why is it a problem?
The key problem with the current role of the RBA in the Australian monetary system is that the foundation stone of our public monetary system, that represents our national full faith and credit, is largely limited to supporting a private bank dominated privatisation model.
In other words, our system of public money has been largely privatised and the key role of the RBA is essentially little more than:
- trying to manipulate borrower demand for loans by the private banks,
- trying to support the operations of the private banks with a public guarantee of private bank deposits and ultimately “Too Big To Fail” guarantees,
- providing some limited bank services to government,
- encouraging/forcing the public to use the private banks, and
- trying to stop an inherently unstable public money privatisation model from blowing up the economy….too often.
The extreme public money privatisation model that is currently operating in Australia is dysfunctional and broken.
But you didn’t need to be told that did you?
What is a Central Bank?
There is a lot of jargon flung around when people talk about central banks which has a tendency to make them sound very complicated and mysterious. They are not complicated or mysterious, although it is definitely in the interests of those who support a privatisation model dominated by private banks to make them sound complicated and mysterious.
When people are confused or don’t understand they tend not to ask too many questions and that is VERY important when your private bank business model depends on making fat profits from the privatisation of what should be a power exercised by the public in the public interest.
The privatisation of the public power over public money is one of the oldest and worst privatisations, especially in the increasingly extreme versions of privatisation that have been adopted in Australia since the 1980s.
The core function of a Central Bank in a public monetary system is (or should be) to:
- Create the money that is recognised as money in the public monetary system, and
- Manage/supervise the operation of the public monetary system.
It is that simple.
How many central banks?
Systems of public money are an essential tool of representative government to deliver the services and policies they have been elected by the public to deliver. The power over public monetary systems is a fundamental power of government, regardless of how big or how small you happen to think government should be.
Warning: This statement is like garlic to neoliberal fanatics who spend their midnight hours trying to erase “money” from all their tidy models and insist that politics-free economics exists outside of their imaginations.
Accordingly it is arguable that every independent and sovereign political community should have a public monetary system and should have a central bank of some type with the responsibility for creating public money and supervising/managing the operation of the public monetary system.
Although, there are good arguments for allowing states and territories, within a federation like Australia, to establish separate state/territory central banks and therefore state based monetary systems (and amend the constitution if required) it is probably best to first end the extreme privatisation of the Australian federal monetary system before establishing additional public monetary systems in Australia.
What is Central Bank created money?
There are three main types of public money that a Central Bank like the RBA might create:
- Deposits on the Central Bank balance sheet
All three are considered from an accounting perspective as liabilities of the central bank.
Coins and notes are straightforward and you probably have a drawer full of the former and a few of the latter in your wallet. Notes and coins are both liabilities of the RBA on its balance sheet and you are allowed to use them and store them in your mattress, freezer and coin jar.
However, it is very unlikely that you will have any deposits on the RBA balance sheet and there is a reason for this. The RBA refuses to let you operate a deposit account at the RBA, even though a RBA deposit account would be a much more convenient way of dealing with central bank liabilities than wads of cash or bags of coins.
The absurdity of not allowing the general public and non-banks to operate deposit accounts at the RBA is the subject of the ongoing campaign by the Glass Pyramid for MyRBA accounts for all Australian’s who want them.
The RBA will, however, allow private banks to operate RBA deposit accounts and it even pays them interest on the balance each day.
The reason for this discrimination between banks and non-banks by the RBA is simple – the RBA is of the view that the public and non-banks should be forced to use the private banks.
Giving the public access to RBA deposit accounts might reduce the demand for ‘deposit’ accounts at the private banks especially the next time one of our ‘unquestionably strong” financial institutions becomes “unquestionably weak” without our regulators noticing.
The refusal to give access to RBA deposit accounts to all Australians is a fundamental part of the privatisation of the power over public money in Australia as it forces people to use and have relationships with the private banks. But more importantly it gives day to day practical substance to the “effectively public money” status conferred on “private money” created by private banks
So how is the power over the creation of public money privatised?
The privatisation of the public power over the creation of public money boils down to nothing more than giving legal recognition to some types of “private money”.
In other words treating some types of “private money” created by some private organisations as if it were created by the Central Bank is how the power over public money is effectively privatised. Private money creation given legal status is effectively a private exercise of what should be a public power exercised for public purposes.
In the Australian monetary system this means treating “private money” created by the licensed banks (ADI) effectively as if it were created by the RBA.
What is this ‘private money’ created by banks that is treated as if it were ‘public money’?
Banks create “private money” when they make loans. Sure they cannot make it without limit but they can make a lot and with a lot more freedom than most realise.
The RBA recently discussed the process and Parts 1, 2 and 3 of this series explain it in detail.
- Fixing Oz Banks Pt 1: Why is “taking deposits” so important to bank “lending”?
- Fixing Oz Banks Pt 2: Banks ‘leaning’ on the public
- Fixing Oz Banks Pt 3: The best way to create deposits? – The RBA v the private banks
Regulating the privatisation of the public power over public money is a nightmare
It is no surprise that when such a profound public power – the power to create public money is privatised – there is a need for lots and lots of regulation to try to control how private banks create private money which is treated as though it was public money.
This is why we have shelves of laws and regulations and armies of public servants and regulators doing little more than trying to control how private profit making banks make private money that is treated as if it were public money.
Nor is it any surprise that the private banks fight tooth and nail to resist regulation, supervision and control over how they use the privatised power to create effectively public money. They insist that they can be trusted and we should burden them with as little red tape and regulation as possible when it comes to how they use the privatised power to create public money.
But any fool knows that giving profit driven companies and bonus driven executives a license to create public money is like putting foxes in charge of the biggest hen house in the county.
That is why hearings of the Banking Royal Commission have been full of feathers flying in every direction as the foxes try to conceal the piles of chicken carcasses surrounding their ‘bonuses’.
What did we expect was going to happen when we allowed the foxes (and their paid up politician pals) to convince us that they could be trusted to run the monetary “hen house” which is what our extreme model of privatised public money creation amounts to.
An expanded but limited role for the Central Bank
If we accept that the experiment over the last 30+ years in an extreme form of public monetary power privatisation has been a dismal failure what then is the alternative?
At the very least we should start winding back the extreme forms of public money privatisation that were introduced in Australia.
This means much more regulation of how those organisations with a ‘privilege’ in respect of bank private money as public money creation, exercise their privilege.
This may mean:
- More regulation of how the privatised power is exercised to ensure that there is less money creation for unproductive purposes such as blowing bubbles in the prices of existing residential housing assets.
- More regulation to discourage unproductive exercises of the privilege generally
- More regulation to reduce the risk of predatory lending.
- More regulation of when and how our private banks can issue liabilities to foreign parties.
However, the simplest solution of all is to simply start shifting the balance between central bank liabilities and private bank liabilities in the monetary system away from the current ratio of 20 to 1 in favour of private bank liabilities.
Shifting the balance towards central bank liabilities will not be difficult because creating central bank liabilities is largely cost free and the demand for private bank liabilities has been massively inflated by the RBA’s refusal to allow the public and non-banks to operate RBA deposit accounts.
A very simple way of increasing the volume of central bank liabilities is to reduce taxes and have the RBA fund the reduction directly.
Alternatively the RBA could do what it already does every day and buy more of the outstanding stock of Australian Government Securities. At least then the taxpayer will receive the interest (via RBA dividends) paid by the taxpayer on those securities.
Should the Central Bank have a monopoly?
A public money monopoly for the Central Bank might be the end point of the reform process but initially the objective will be no more than to simply start rebalancing the public monetary system away from private bank liabilities towards a larger role for central bank liabilities. In the event that the reform process indicates a monopoly would be beneficial, the only thing that the Central Bank should have a monopoly of is the creation of the liabilities that can be used as public money in the monetary system that it is responsible for administering.
In other words it does not need nor should it be given or should it attempt a monopoly over all “money” in the economy.
A monopoly over ALL money is the kind of thing that the current extreme privatisation model of public money creation argues for and the reason is obvious. The private banks would love nothing more than to completely dominant a monetary model that tolerated no competition of any type.
Private banks and other organisations should be entitled to create competing systems of money if they choose to do so. Though naturally those competing systems of money will not be in the same unit of account. They will be explicitly separate monetary systems. Just as the $US and the $AUD are separate monetary systems.
Westpac might choose to create private bank notes that represent liabilities of Westpac, they might be denominated in the Westpace Wazza.
Alternatively bitcoin and other cryptocurrencies could be other private monetary systems that co-exist and compete with the Westpac Wazza and the AUD issued by the Reserve Bank of Australia.
There are already hundreds of monetary systems on the planet and the more the merrier.
The only thing the RBA should have a monopoly over is the creation of the AUD.
What about a “public option” for other financial services
The RBA should only offer a single type of service to the public. A system of Central Bank liabilities that can be used as a system of public money. A system of:
- Deposit accounts
Having regard to the recent performance of many of our private financial institutions there has been an understandable wave of support for a public option to be established for a range of financial services including:
- home loans
- personal loans
- insurance products
- superannuation products
- investment services
In other words many people are arguing that the government should establish public owned organisations to provide the public with the option not to use a private organisation for those services.
However, providing those services is not the job of the Central Bank like the RBA.
A Central Bank should not be in the business of making loans, offering insurance products or other financial services.
A Central Bank should stick to its knitting and focus on
- Create the money that is recognised as money in the public monetary system, and
- Manage/supervise the operation of the public monetary system.
Just keep it simple
Further reading – Earlier parts of the series Fixing Oz Banks
This is part 7 of the multi-part series “Fixing Oz Banks”. Earlier parts appear below:
- Part 1 – Fixing Oz Banks: Why is “taking deposits” so important to bank “lending”?
- Part 2 – Fixing Oz Banks: Banks ‘leaning’ on the public
- Part 3 – The best way to create deposits? – The RBA v the private banks
- Part 4 – One small step at a time
- Part 5 – What happens next?….more small steps
- Part 6 – Making a difference?…a response to Joe
Part 1 discusses how private banks use their legal privilege to ‘take deposits’ to create deposits ‘out of thin air’ and extract interest in making these created ‘deposits’ available to the public.
Part 2 discusses how the private bank ‘deposit creation’ for profit model is dependent on and facilitated by the publicly owned Australian Central Bank – the Reserve Bank of Australia (RBA)
Part 3 discusses how the relationship between the RBA and the Private Banks with regard to ‘deposit creation’ should be reversed and instead the RBA become the exclusive and interest free creator of the deposits required by the public monetary system.
Part 4 discusses how the first step in the reform process involves nothing more than the RBA allowing any Australian to open a deposit account at the RBA so they can save conveniently and securely in 100% safe central bank liabilities. See also the following additional post on how the RBA effectively forces Australians to save in the form of unsecured loans to private banks.
Part 5 is a discussion of some of the implications of allowing Australians to operate MyRBA deposit accounts at the RBA.
Part 6 – Responds to a comment from “Joe” as it raised some important questions about the project to reform Australia’s banking and monetary system.