The below is some more writing on how Australian monetary system came to form. There is a rather dry boring post here that deals with legislative instruments and various changes.
I deal with some background on how private banks issued notes prior to 1910 and why The Australian government chose to issue notes. There are institutional arrangements that restricted The Australian governments ability to spend and this is largely why the depression happened (e.g Gold Standard)
The Australian Notes Act was designed to replace the system of private bank note issuance and used to command real resources. The previous privately issued banknotes derived authority from various legislative instruments, which in turn derived their authorities to the tax driven nature of the British monetary system.
I’ll note prior to private note issue of the banks, Australia was a penal colony that didn’t have a need for a monetary system during the early years. A system of private promissory notes/bills was established that were used to gain access to supplies from the commissariat. Australia’s monetary system evolved from those early promissory notes and the tax driven nature of the British monetary system. One example of which was Governor Macquarie declaring the dump and holey as currency declaring its value at 15s 5d and setting the price of all animal Food and Grain of every Description, and all other articles of Trade and Merchandise whatsoever, received into His Majesty’s Stores in any part of this Territory, or otherwise supplied for the use of His Majesty’s Government, will be paid for in the above described Silver Money, at the Value above mentioned e.g wheat was 8s per bushel.
Draft Australian Currency from 1909
Australian currency has its origins in the coinage act of 1909 that mandated A tender of payment of money, if made in coins which are British coins or Australian coins of current weight, shall be a legal tender and banned the minting of other coins; No piece of gold, silver, copper, or bronze, or of any metal or mixed metal, of any value whatever (other than a British or Australian coin), shall be made or issued as a coin or as a token for money, or as purporting that the holder thereof is entitled to demand any value denoted thereon. (Coinage Act, 1909)
Privately issued banknotes and various State Treasury note issuance were still in circulation prior to 1910. The Government of Queensland was the only colony to have Treasury issue their own notes payable on demand (Qld, Treasury Notes Act of 1893). NSW had begun to regulate note issuance in 1893 mandating the gazetted banks should have no more than one third of paid up capital of notes in circulation and mandated that these notes must be exchanged for gold at the banks respective head offices. (NSW, Bank Notes Act, 1893)
Bank notes in circulation derived their authorities from various legislative instruments. NSW had begun to legislate for note issuance via the establishment of banks. The Bank of Australia Act 1827 where upon its establishment was for ‘the purpose of discount and issuing of notes and bills and lending monies on securities and cash accounts for the receiving monies on deposit accounts for the safe custody of monies and securities for monies as also for transacting and negotiating all other matters and things connected with the usual and ordinary business of banking’ (NSW, Bank of Australia Act, 1827) Other banks established via the legislative assembly of NSW include The Commercial Banking company of Sydney, 1848 and Bank of NSW, 1850. These acts specified ‘That all such notes shall bear date at the city town or place at and from which the same respectively shall be made and issued and that the same respectively shall in all cases be made payable in specie on demand at the place of date and the total amount of the promissory notes payable on demand issued and in circulation shall not at any one time exceed the amount of the capital and stock of the said corporation actually paid up.’ (NSW, Commercial Banking Company Act, 1848)
Victoria has its origins in legislating note issuance of banks in The Banks and Currency Statute, 1864 that ‘extends and apply to every company firm or individual engaged in the ordinary business of banking by receiving deposits and issuing bills or notes payable to the bearer at sight or on demand.’ (Vic, The Banks and Currency Statue, 1864)
By 1909 the Australian Government had legislated the Bills of Exchange Act with cross checks to the relevant state legislation. These included:
NSW; The Bills of Exchange Act 1887. No. 2, The Banks and Bank Holidays Act 1898. No. 9, The Banks Half-holiday Act 1900. No. 80. Victoria; The Instruments Act 1890. No. 1103, The Banks and Currency Act 1890. No. 1164, The Public and Bank Holidays Act 1897. No. 1534, The Instruments Act 1904. No. 1925. Queensland ; The Bills of Exchange Act of 1884. No. 10, The Bank Holidays Act of 1904. No. 8, The Bills of Exchange Act Amendment Act of 1905. No. 7. South Australia; The Bank Holidays Act 1873. No. 19, The Bills of Exchange Act 1884. No. 312 The Bills of Exchange Amendment Act 1904. No. 867. Western Australia The Bank Holidays Act 1884. No. 9, The Bills of Exchange Act of 1884. No. 10, The Bills of Exchange Act 1904. No. 54 Tasmania; The Bills of Exchange Act 1884. No. 14, The Bank Holidays Act 1903. No. 4, The Bills of Exchange Act 1905. No. 7, The Bills of Exchange Amendment Act 1906. No. 29.
The above listed acts (and their principal acts) governed the promissory note issuance of the retail banks. Various banking corporations established via legislative decree (all in NSW) and various banks established via royal assent had their note issuance governed by their respective legislations.
By 1910 The Australian Labor Party made attempts to eliminate private bank note use and have Treasury issue notes. They succeeded in passing the Australian Notes Act of 1910 that barred state and private bank notes being issued after the proclamation date as well as the Bank Notes Tax Act 1910 that imposed a tax in respect of all bank notes issued or reissued by any bank in the Commonwealth after the commencement of this Act, and not redeemed. (Bank Notes Tax, 1911)
The Australian Notes Act was introduced by the Labor Fischer Government. There was opposition with the member for Wentworth, Mr Kelly objecting ‘We ought further to be informed what guarantees the public will have that this particular method is not being adopted for the purpose of raising money without paying interest thereon by a Government which refuses to borrow. (House of Representative Hansard No.#30, 1910 p.690) There appears to have been concern from private interests with Senator Weedham articulating concerns that financers in the United Kingdom would be deprived of profits.
‘Under this Bill, the persons in the Old Country to whom we have hitherto gone for the purpose of raising money with which to develop our resources will find themselves deprived of a certain amount of profit, and their agents also may have cause for annoyance.’ (Needham, Fed Senate Hansard, Tuesday 6 September 1910)
We do not deal with private credit issuance in this paper but wish to state that by 1940 it was understood all money (including credit) is a promise to pay either goods or services on demand. Whether that promise to pay is stamped on a coin, printed on a note, or simply printed on a bank’s ledger, does not alter the fact that the vital thing is the promise to pay, and not the mere material upon which it is written. In ‘The Story of a Commonwealth Bank’ states the reason the Government legislated in respect to the bank note, is that they thought they understood it, and the reason the why the Government did not legislate regarding the bank deposit (credit) is because they had no clear understanding about it at all. (Amos, p3, 1940)
The opposition to Treasury issuing their own notes and hostility by the capitalist class who had their ability of note issuance stript and in some instances interest payments on borrowing lost, a desire to rest control of note issuance remained. We will look at this in further detail later, though by 1924 there was a board in place at the Commonwealth Bank that had the discretionary power to approve note issuance with no ability for the Treasurer to issue notes, even via proclamation. There either needed to be board approval or a legislative change. Considering the opposition to the initial Treasury Note issuance during the second reading of the Bill The Prime Minister affirmed
The principle of the Bill is practically embodied in the statement that if any person or corporation desires to have Commonwealth notes, application will have to be made at the Treasury, and a deposit made in gold of their face value. (House of Representative Hansard No. #32, p.1228)
The Australian Notes Act made provision that the intent of the Notes act limited the supply of note issuance to seven million pounds. The member for Calare Mr. Thomas Brown during the second reading made the comment.
‘The proposal now before us is that the Commonwealth shall issue notes to the amount of £7,000,000,’ [House of Representatives Hansard No. 32, p1464]
A year later the act was amended on 22 December 1911 to remove the requirement to equivalent gold for note issuance above seven million pounds. Though still required ‘The Treasurer shall hold in gold coin a reserve of not less than one-fourth of the amount of Australian Notes issued.’ (Australian Notes No. 21 Amendment, 1911)
Taxation Arrangements and the Consolidated Revenue Fund
Upon federation the new Australian Government’s second act was to appropriate sums of money out of the Consolidated Revenue Fund. (CRF) The CRF draws its existence under section 81 of the Australian Constitution. Section 83 states ‘No money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law.’ There are two types of appropriation bills. Annual appropriation acts and acts that include special appropriations. (Guide to Appropriations, https://www.finance.gov.au/publications/resource-management-guides/guide-appropriations-rmg-100)
The Australian Government didn’t have its own coins or notes until 1909 and 1910 respectively. Though the bill appropriates some £491,882 including sums of money to the states. We can infer that taxation arrangements from federation until the note issuance act 1910 ‘funded’ the Australian Governments expenditure which derived ‘value’ from the tax driven nature of the British monetary system. The various colonies (now states) had legislated definitions of currency and mandated British or Colonial Gold Coins to be only legal tender for payments (NSW Currency Act, 1855) The colonial authorities (now states) and the Federal Government largely derived their capacity to spend by the sterling deposits within the Australian banking system.
Prior to the note issuance act of 1910 the Australian government passed a number of excises, taxes and license fees in its first year. The first decade of legislation ‘debated’ in the Australian Parliament is rather ‘uninspiring’. It consists mostly of appropriating money from the CRF for the business of running the government. The other acts within the first year of Parliament mostly consist of ‘revenue’ measures. These are a Customs Act, Beer Excise Act, Excise Act and a Distillation Act all of which place money into the CRF. These sums are denominated in pound-sterling.
It was at a similar time to the introduction of Australian note issuance that the Government of the day put forward a Land Tax Act and a Land Tax Assessment Act.
Land tax shall until payment be a first charge upon the land taxed in priority over all other encumbrances whatever, and notwithstanding any disposition of the land it shall continue to be liable in the hands of any purchaser or holder for the payment of the tax so long as it remains unpaid:
During the years after the Australian Note Act 1910 was passed, the notes were issued in the following ways;
- A considerable quantity of them was given to the banks in exchange for gold (sometimes £3 in Australian notes were given for £1 in gold) for, by legal enactment, the Government was compelled to hold a reserve in gold equal to one-fourth of its note issue.
- A number of short-term loans at interest were made to the States.
- A number of fixed deposits, bearing interest at 3 to 5% were made in different banks. These fixed deposits amounted in 1920 to £5,426,600.
- More than half of the notes were invested in Common wealth stock and State securities at various rates of interest. (Amos, p.4 1940)
These notes that were then issued could redeem the tax liabilities mentioned above.
The Establishment of the Commonwealth Bank
In 1911 the Australian Government legislated for the creation of the Commonwealthbank. The act mentions that ‘The Bank shall not issue bills or notes of the Bank for the payment of money payable to bearer on demand and intended for circulation.’ (Commonwealth Bank Act, 1911) with the Labour Fisher Government keeping note issuance under Treasury and eliminating the issuance of private bank notes. It’s role was to provide competition to the private banks in relation to credit issuance.
The Fisher government who was responsible for setting up current monetary arrangements, with note issuance placed in the hands of the Treasury and eliminating private bank note issue, had been defeated in the federal election of 1913 with Commonwealth Liberal Joseph Cook becoming Prime Minister by only one seat. A double dissolution election was called prior to the declaration of WWI being made in August of 1914 returning the ALP Fisher Government to power.
The first ‘real’ test of Australia’s monetary system came during World War I with deficits peaking at twelve percent of GDP. The War Precautions Act 1914 provided the Australian Government with the power for ‘preventing money or goods being sent out of Australia except under conditions approved by the Minister’ We note here the Australian’s government ability to spend was limited by the legislative arrangements under the Note Act 1910-1914. ‘The Treasurer shall hold in gold coin a reserve of not less than one-fourth of the amount of Australian Notes issued’ The ability for note issuance fell under section 5 of the act that says ‘The Governor-General may authorize the Treasurer from time to time to (a) issue Australian Notes; (b) re-issue Australian Notes; and (c) cancel Australian Notes.’
In 1919 the ALP had lost government and National Party leader Billy Hughes was Prime Minister. The National Party formed from the 1916 ALP split. By 1920 the responsibility for note issuance was transferred to the Commonwealth Bank and maintained in the note issuance department. Changes in 1920 placed the note issue under the responsibility of a board of directors. ‘The Note Issue Department shall be managed by a Board of Directors composed of the Governor of the Bank and three other Directors appointed by the Governor-General in accordance with this Part, of whom one shall be an officer of the Commonwealth Treasury.’ (Commonwealthbank Act 1920) Further changes were made in respect to note issuance in 1924 ‘(1) The Bank shall be managed by a Board of Directors composed of the Governor and seven other Directors. (2.) Subject to this Act, the seven other Directors shall consist of— (a) the Secretary to the Treasury ; and (b) six other persons who are or have been actively engaged in agriculture, commerce, finance or industry.’ (Commonwealth Bank Act 1924)
Attempts to Establish a Central Bank
In 1930 the Labor government with treasurer E.G Theodore tried to establish a central bank in Australia. During the second reading of the house of representatives Theodore in regards to central banking stated there were ‘three outstanding exceptions being Australia, Canada and the Argentine’ The bill’s aim was for ‘a new system for the control and organization of credit in Australia’
Part II of the Act stated:
Each bank carrying on business in the Commonwealth shall establish and maintain with the Reserve Bank reserve balances of not less than ten per centum of its demand liabilities within the Commonwealth and five per centum of its time liabilities within the Commonwealth.
Theodore stated ‘A central bank can aid greatly in tiding a country over a period of financial stringency and credit difficulties by concentrating the reserves of all the banks operating in the country, and enabling the best use to be made of them.’
This was the principal aim of the creation of a central bank. It forced the private trading banks to hold accounts with the central bank and thus gave the government control over monetary policy (interest rates) and regulated the credit the private banks could issue.
[Fiduciary notes bill 1929-30-31 to go here] There is interesting detail about political momentum not being strong enough to get through the legislation necessary to have a more exapansionary fiscal policy. The instigator of Central Reserve Bank Bill and Fiduciary notes bill is ex-premier of Queensland, Theodore who was unable to pass the Unemployed Workers Bill 1919 in Queensland during his term. The bill would have ended involuntary unemployment within the state. During Theodore’s term as Treasurer a visit from a BoE offical Otto Niemeyer tabled a paper to parliament to ensure Balanced Budgets No Matter the Human Cost. There seems to be evidence at maintaining the high unemployment figures but I am still working through the detail of all this.
Gold Standard Changes
It may be the case that as a result of the failed bills mentioned above in efforts to end the depression by lifting the rate of spending a number of amendments to the gold standard were made to the Commonwealth Bank Act in 1929. The treasurer and the board of the bank now had the power to: (a) to require persons to furnish particulars of the gold coin and bullion held by them; and (b) to require persons to exchange for Australian notes any gold coin or bullion held by them.
The amendments went onto detail the banning of the export of gold. It gave provision for the Governor General of the bank with recommendation from the board to ‘prohibit the export of gold from the Commonwealth’ Any person wishing to export gold had to apply in writing to the Commonwealth bank board and seek approval of the treasurer. Exporting gold without permission a penalty of a minimum £100,000 was imposed or imprisonment of one year. [Commonwealth Bank Act 1929]
As the depression ensured, in 1931 amendments to increase note issuance by reducing the gold reserves passed. Gold reserves were reduced from a minimum of 25% to be held in bullion to 15% for two years between 30 June 1931-1935. The gold reserve gradually increasing to a minimum of 18% between 30 June, 1933-34; 21.5% between 30 June 1934-35; and 25% by 30 June 1935.
By 1932 further amendments were made to reserves. The amendment to the Commonwealth bank act removed the term ‘coin and bullion’ and replaced it with “The Board shall hold in gold ‘or in English sterling or partly in gold and partly in English sterling’ a reserve of an amount not less than one-fourth of the amount of Australian notes issued.” (Italics highlight the changes from the original gold reserve clause added in 1920)
The act also provided for notes that had not been redeemed to be placed on the credit of the reserve account.
(3.) For the purposes of the last preceding sub-section, notes of a denomination not exceeding One pound that have not been presented for payment within twenty years from the date of issue, and notes of a denomination exceeding One pound that have not been presented for payment within forty years from the date of issue, shall be deemed to have been redeemed and the amount of those notes shall be placed to the credit of a reserve account to which shall be debited the amount of any such notes subsequently presented and paid.
Why’ll the above is still missing bits and pieces it aims to show through the various legislative changes the Australian note issue as linked to the ‘value’ of British sterling of which The Australian government mandated be kept as reserves via British sterling or gold). It shows the constraints on spending to be of a political nature and not one of an inability to spend. e.g board approval for commonwealth note issue. I note there were political constraints in ending these institutionalised arrangements in respect to the governments spending despite efforts to the contrary e.g fiduciary notes issue. This is still a work in progress that should hopefully be completed soon!