Establishment of the Reserve Bank of Australia

January 13, 2019

On 14 January 1960, the Menzies Coalition Government established the Reserve Bank of Australia (RBA) as our central bank, money supply, inflation governor and currency issuer. 

The RBA Act of 1959 removed these central banking functions from the then 'Commonwealth Bank', which continued as a government trading and savings bank until it was privatised in the 1990s.

Unlike the central banks in other key Western economies (such as the United States of America), the RBA is a government business enterprise (GBE). It is not privately owned or operated by oligarchs under national regulations, and the profits from its operation are the property of the Australian government and taxpayer.

The RBA was instrumental in breaking Australia's high inflation inherited from the 'industrial club' days of the 1970s. Those days, incidentally, stubbornly persisted through the 1980s and could well return under a Shorten-McManus Labor-ACTU power-sharing deal.

The RBA's very high interest rate policy of the 1980s (with rates well beyond 15%) helped precipitate then Labor treasurer, Paul Keating's famously declaring the 'recession we had to have' in the 1990s.

The RBA’s key role since then has been to keep inflation between moderate and low levels, avoiding the (often obscure but nonetheless harmful) economic costs of high and volatile inflation, particularly on certainty, investment in new assets (eg new projects, plant, equipment and production), productivity growth and therefore future prosperity – see further details below.

Mark this day of RBA establishment by:

  • visiting the RBA or its Museum and checking out their official spiels on monetary and economic matters
  • watching these (official) clips on the bank, its framework, policies and operation
  • reading further about the bank today and its history
  • apprising yourself of the Conservative Party’s principles and policies regarding the economy and government, and/or
  • sharing this Action Plan post on social media with family, friends, conservatives, classical liberals and those wary of a Shorten Labor government teamed with the ACTU and the powerful CFMEU 

Further details on inflation and the RBA

As Milton Friedman and Austrian School economists point out, beyond the short term, inflation is purely a “money supply growth” phenomenon. To keep inflation low-moderate over the medium and long term, the growth in the broad money supply (which also includes debt issued by fractional banking to purchase, for example, existing assets) should not exceed the growth in the real value of goods and services produced in the economy. Otherwise, the excessive broad money issued (brought forward from our future, in the case of debt, with an interest fee) will show up in inflation somewhere, but not necessarily in the growth of a narrowly-defined and calculated Consumer Price Index (CPI) – the RBA’s current (but dated) proxy for growth in the supply of broad money and inflation.

Growth in the CPI captures how the cost of a basket of typical consumer purchases (eg bananas, bread, fuel, etc) increase over time. It may not track well the growth in broad money, which can be much higher than CPI growth but manifest in growing asset and housing price bubbles fuelled by debt.

This element of inflation (ie debt-fuelled asset price bubbles) is real and harmful, particularly to decisions regarding investment in new assets and productivity (see above). Yet at best it is only partly captured by CPI growth. As such, it is increasingly arguable that the RBA’s inflation-fighting mission – minimising harmful inflation costs and maximising future prosperity – is being poorly executed, as broadening money growth finds its way into pumping up the demand and prices of existing assets, instead of underpinning new investment (which depends on greater price certainty), largely circumventing CPI.

In recent times, rather than fixing its narrow, inadequate inflation proxy, RBA leadership has encouraged wage rises (of a flavour appealling to unions, not specifically related to productivity improvements at the enterprise level) to help boost CPI growth into the RBA’s target inflation band (of 2-3% over the cycle). This way, the RBA can better justify normalising record-low interest rates and curtail the debt-fuelled asset price bubble that has grown on their watch, particularly since

  • the mining construction boom ended in 2012
  • the property market becoming the safe harbour for easy money/credit, and
  • Ponzi-scheme record immigration intakes.

RBA leadership has also recently propounded that, should economic hard times return to Australia (eg a financial or other economic shock), it would respond with Keynesian stimulus measures such as:

  • looser money (eg lowering official interest rates further, even using quantitative easing – in effect, the mass-printing/issuing of money through the RBA buying government debt), and
  • encouraging governments to deficit-spend to maintain demand

which largely kicks the can (of debt reckoning) down the road (again, as the West’s response to the GFC essentially did).

 

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