Word War II and Post War Reconstruction

As part of a project into the history and development of Australian currency I have written a little more of the events that took place over WWII that led to Australia’s post war reconstruction. The events start at the end of the thirties and go through to just before the Commonwealth Bank was created and a Central Bank in 1945.

The Commonwealth Bank Act 1945 repealed the previous Commonwealth Bank Act 1911-1943 and recreated it as a central bank. A well known public servant H.C Coombs was largely responsible for the rationing system over the war and the creation of Australia’s post war reconstruction. He trained as a secondary teacher but over the 1930’s received his PhD in economics and went on to work in various capacities for the Commonwealth Government.

If you can obtain a copy of his book Trial Balance (now out of print) he details these extraordinary events and the shift in thinking not only of a defunct economic paradigm that was used over the 1930’s but also in society more broadly.

The finished paper will be a more coherent narrative some of which feature in the following posts and more!

Currency Issuing Governments Finance Themselves
A History of Australian Coinage and Note Issuance- Part 1
History of Australian Currency – More Detail
Let’s have a rational debate on government spending.
The Mainstream are Trying to Stay Relevant

Preparations for WWII and War Rationing

Various financial statements and budget speeches in 1939 and 1940 were stating that with a given workforce and existing pattern of technology and industrial organisation there was a maximum real Gross National Product (GNP) which would for practical purposes be reached when available labour was fully employed. 


The National Security Act 1939 had given powers to The Governor General to make regulations for securing the public safety and the defence of the Commonwealth and the Territories of the Commonwealth, and in particular— (h) for preventing money or goods being sent out of the Commonwealth except under conditions approved by any Minister of State; as well as other mechanisms to make provision for the Safety and Defence of the Commonwealth and its Territories during the present state of War. 

This act in conjunction with the changes to the Commonwealth Bank amendments 1929, in effect abandoning a gold standard allowed for the Commonwealth to implement a system of rationing.  There was contention within the Fadden Government. 

By 1941 preparations were being made for a wartime economy. Chairman of the Financial and Economic Committee Lyndhurst Giblin had been in contact with Keynes regarding propositions that if the war effort was to be accomplished an additional transfer of resources amounting to 10 per cent of the total available would from civil to war purposes had to be achieved. 

In a response to Giblin, Keynes had replied

to deprive the economic system of the freedom represented by uncontrolled prices through rigorous price control supplemented necessary by rationing and by strong propaganda in favour of increased saving out of the margins of income preserved in favour of individuals by price fixing policy.  (Coombs, 1981 p.11)

In a statement submitted to cabinet Fadden regarding his budget proposal submitted

There is a physical limit to our resources of manpower, equipment and materials and…the new programme will impose a severe strain on those resources. Last year (40/41) 15% of National Income was devoted to the war effort; this year (41/42) it would be 23%. The transfer of resources to achieve this must mean a substantial fall in civil production. The financial measures chosen must be designed to effect the necessary transfer. (Coombs, 1981 p.12)

In terms of an economic strategy the Finance and Economic Committee was preparing for a system of rationing as per the correspondence between Giblin and Keynes.  There was awareness that rationing as a result of trade restrictions and production would need to occur. As a result of this Keynes had pointed out to Giblin ‘fairness of distribution social security would necessitate rationing’ In February of 1941 the Committee advised ‘Direct rationing or restriction of supplies of specific goods or services, chosen because the resources they use are most adaptable to war purposes.’ (Coombs, 1981 p.12) 

‘There was a view within the Committee that direct rationing to consumers appeared inevitable and that plans to introduce and organise it should be prepared in secret by the Department of Customs’ (Combs, 1981 p.13)

The ABS 1301.0 Year Book Australia No. 35 1942-43 Commonwealth Food Control (1939-49 WAR) notes; 

‘Australia began in 1938 to prepare for food control in the event of war, not only to safeguard her economy, in which exports have always occupied an important place, and to protect primary producers against market collapse, but also to ensure that essential supplies moved quickly to the United Kingdom. Plans were laid then for mass marketing to replace individual enterprise, and understandings were reached that as far as shipping was available, the United Kingdom would take the export surpluses of most of our principal foods.’

The Year Book Australia 1944-45 notes the reasoning for rationing. 

‘War conditions necessitated civilian rationing of clothing and certain foodstuffs in Australia. The main reasons for clothing rationing were the serious falling off in imports, increased Service demands, and reduced labour for local production of textiles and making up of garments. The supply to the United Kingdom and the Australian and Allied Services of maximum quantities of foodstuffs necessitated the rationing of sugar. butter and meat, while reduction in imports, consequent upon enemy occupation of Java, necessitated the rationing of tea. In addition to the controls exercised by the Rationing Commission, rationing of certain other commodities is directed by other departments, e.g., petrol, tobacco, liquor, etc.’ (ABS 1301.0 Year Book Australia,Clothing and Food Rationing, 1944-45)

As the concern built within the Committee around the Fadden Government’s failure to implement rationing measures onto the civilian population and the political constraints within the Parliament, the Fadden Government’s 1941/42 budget failed to pass the House of Representatives. Two independent members of the House, Alexander Wilson and Arthur Coles crossed the floor.  Fadden resigned from office and the support of the two independent members of the house gave support to John Curtin and Ben Chifley delivering  the ALP under Curtin and Chifley Government. 

By 8 May 1942 Prime Minister Curtin had announced Australia would enter a system of rationing and by 17 May 1942 a Rationing Committee was formed. It was decided that a coupon system be introduced with interim arrangements being proposed before clothing supplies were depleted. (Coombs, 1981 p.20-21) 

A coupon system was devised in respect of Clothing, Food and Petrol. 

‘Coupon Rationing. After examination of the systems of rationing operating in other countries, it was considered that coupon rationing was preferable to a system of consumer registration, since it allows consumers to purchase from any retailer and also provides a comparatively simple control of traders’ replenishment of stocks by means of the passage of coupons to their suppliers. Food coupons are provided in the general Food Ration Book issued each year.’  (ABS 1301.0  Year Book Australia,Clothing and Food Rationing, 1944-45)

This coupon system would last throughout the war and was the means by which Australian citizens would obtain essential goods and services. The Food Ration Book provided each year per household negated the need to spend currency that was earned. 

Australia’s Post-War Reconstruction

Following the end of the war the Government was seeking a means to continue it’s control over the economy with similar wartime powers.  A failed 1944 referendum sought an insertion of a Chapter 1A in the constitution 

6oA.—(i.) The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to—
(i) the reinstatement and advancement of those who have been members of the fighting services of the Commonwealth during any war, and the advancement of the dependants of those members who have died or been disabled as a consequence of any war ;
(ii) employment and unemployment;
(iii) organized marketing of commodities ; etc…  (ABS 1301.0 Year Book Australia No.35 1942-43 p.65-66)

The failed referendum required another means to continue the Full Employment achieved over the war. 

There was a shift in thinking as a new economic paradigm emerged. The collective conscience within our society was driven largely by remembrance of what was experienced over The Depression, what was possible as seen over the war and a desire to maintain the same level of production during peacetime. Within academia, elected representatives and a new generation of public servants – Keynes’ General Theory gave them the authority to implement what only a decade prior was seen as ‘radical’.

These events led through to the 1945 Tax White Paper on Full Employment and The Commonwealth Bank Act 1945 which created the Commonwealth as a central bank. Coombs in his text Trial Balance writes

‘Generally the functions of a central bank are: to print and control the issue of legal tender notes; to hold the country’s international reserves of gold and foriegn currencies; to act as banker to other banks, holding deposits from them; to exercise control over banks’ lending policies; to act as banker for governments and their major agencies, and frequently to arrange their borrowing; and to influence the policies of non-bank financial intermediaries which make loans.’ (Coombs, 1981 p.142)

A position that was resisted by capital for decades was finally defeated and our elected representatives had more discretion on controlling an interest rate and fiscal policy (having been subject to various impediments prior) to achieve their socio-economic outcomes.

How loans create deposits and why we should have public banking…

I thought this post should explain in further detail, the nature of how financial institutions extend credit (by creating it) why I think it should be a public good and how it is possible to create affordable housing and ensure housing for all seeing how I called for 0 per cent home mortgages and the elimination of debt.

First we need to conceptualise two ‘spreadsheets’. One set of spreadsheets are the demand deposits you see in your bank account. The second set of spreadsheets are Authorised Deposit Taking Institutes [ADI] accounts at the central bank. In Australia these are referred to as Exchange Settlement [ES] accounts.

The important distinction to make is that we use the term money to refer to multiple money-things. When I use the term reserves I am referring to ‘money’ in ES Accounts at the central bank and when I use the term demand deposit, that is ‘money’ you see in your bank account and then we have physical notes and coins.

figure 1

In the graph above I have visualised this. Like you can open your online banking app and can view the demand deposits you have in your account, an Authorised Deposit Taking Institute [ADI] can log into the RBAs system and view the reserves they have in their system.

They are called demand deposits because if you go into the bank or use an ATM the bank provides you with the physical notes on demand. When you make an online payment for a bill or you transfer ‘money’ to a business or an individual, at the end of the day ADIs will exchange reserves with each other to settle payments.

When ADIs request physical cash from the RBA, they must have reserves in their ES accounts. If they request $20 million, their reserves are debited by that amount and the physical cash is delivered. The reverse happens when they deposit the physical cash with the RBA and their ES accounts increase.

The Bank of England in its 2014 paper ‘Money Creation in the Modern Economy’ said this:

‘Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.’

When a loan or credit is issued an ADI (the green level in the above figure) uses a computer to mark up the size of the relevant account. More money is added to the demand deposit and both a liability (for the recipient of the loan) and an asset (it is an asset for the issuer of the loan) has been created.

The next step is to ensure there are sufficient reserves in the system so when the recipient of the loan makes a payment to a currency user that banks with a different bank, the ADI can make payment. It is the job of the central bank (which in Australia is the RBA) to ensure there is sufficient liquidity in the system which is a jargon way of saying it is the RBA’s job to ensure banks have sufficient reserves to pay each other.

Financial institutions have an unlimited ability to create credit, They lend to credit worthy customers and satisfy their reserve requirements at the end of each day. Each financial institution has an account with the central bank and these must be positive at the end of each day.  The question arises ‘How are reserves added too?

Reserves are added to in several ways. One way is through Federal Government spending. This is pretty logical and straight forward.

figure 2

When the Treasury spends there is an instruction from an official in that department (after an appropriation bill has passed) and the Australian Office of Financial Management records it and an instruction is given to the RBA to mark up the relevant ES account and the recipient of the new spending. The deficit spending at the end of each day is the new spending that has entered the system. A surplus does the opposite and there are less reserves.

The Governments deficit spending adds net financial assets to the system. There is no corresponding liability to the creation of this money unlike when an ADI issues a new loan.

Because the Federal Government spends and taxes which increases and decreases reserves one of the central banks jobs is to ensure liquidity in the payments system. That is, it is, it’s job to ensure there is enough dollars in ES accounts to ensure the payment system operates and ADIs can pay each other. The RBA website says this:

The Reserve Bank needs to transact in the domestic market almost every day to keep the supply of settlement funds at the right level. This is because transactions between the Reserve Bank’s customers and financial institutions (and their customers) change the supply of ES funds. As the Australian Government is a customer of the Reserve Bank, these gross flows can be very large. Expenditure and payments by the Government adds ES funds to the account of the recipient (or their financial institution), while receipts [taxes] have the opposite effect.– https://www.rba.gov.au/mkt-operations/dom-mkt-oper.html

At the commencement of each day the RBA will estimate the required amount of reserves needed in the payments system and it will conduct securities transactions to ensure all payments clear. ‘Securities transactions’ are jargon for buying and selling treasury bonds. They then have a second round in the late afternoon.

“Securities transactions are conducted almost every day in the ‘open market’ by the Reserve Bank. Each morning, the Reserve Bank announces its dealing intentions, inviting financial institutions to propose transactions that suit the Reserve Bank’s purposes. Counterparties are able to sell highly rated debt securities to the Reserve Bank either under repurchase agreement (repo) or outright sale.

Late each afternoon, the Reserve Bank announces whether an additional round of open market operations is required. Uncertainty in the timing of payments to, and from, clients that hold accounts with the Reserve Bank (mainly the Australian Government) can give rise to unforeseen fluctuations in ES funds during the day. The additional round gives participants the opportunity to either lend excess balances back to the Reserve Bank or borrow the shortfall on a secured basis.” – https://www.rba.gov.au/mkt-operations/dom-mkt-oper.html

When the RBA purchases a bond or another form of security it adds reserves to the system. Think of it as moving dollars from a term deposit (that has money locked away) to now having money you can spend in your transaction account. Selling a bond has the opposite affect. It removes dollars from ES accounts and places them in securities accounts that earn interest. It is similar to placing money into a term deposit account.

If any bank is short of reserves for the day there is an option to secure a loan from the RBA. It is called the ‘penalty window’ because it attracts a 25 basis point premium above the target cash rate (which you can learn about later)

When central bankers say reserves aren’t deposit constrained it is because under license, financial institutions have an unlimited capacity to issue credit that they then charge you the privilege for and a nations central bank will always ensure payments will clear.

It’s here where you need to make a distinction between earned and unearned income. Classical Economist had as a guiding principle that everyone deserved the fruits of their own labour and they developed analytical tools to develop ‘overhead’ costs. There aims where to distinguish between the necessary costs of production and value from the unnecessary and parasitic costs in production. These became economic rents. An efficient economy is about eliminating these economic rents that don’t add value. They are things like monopoly pricing, land rents, interest and forms of income where the earner hasn’t laboured to produce anything. They’ve extracted the value of your labour.

Along with claiming masses of unearned income, financial institutions, by their nature to issue credit hold tremendous power over the rest of the economy.

Giving private banks the ability to create credit gives bank an incomparable power over the rest of the economy. They don’t just control how much money is created but where this money goes. It gives private for-profit banks enormous power to determine the level of composition of investment, demand and production within an economy and the power to engineer credit driven booms (such as the housing market)

Mitchell, W., Fazi, T., 2017, ‘Chapter 10: The Case of Renationalisation’ ‘Reclaiming the State, Monetary Sovereignty: A Primer, Pluto Press, Archway Road, London. pp 255 – 259

By nature of how financial institutes operate they are guaranteed by public money. The RBA states:

Bank deposits become a risk-free asset for households and business in Australia because they have an effective government ‘guarantee’ (up to a limit) and receive the first claim on banks’ assets.


Referencing ‘Reclaiming the State’ again:

Given the crucial and systemically relevant role banks play in the economy, they should be considered public institutions. Bank deposits are guaranteed by governments and financial institutions have access to unlimited government funds as the GFC clearly demonstrated

Mitchell, W., Fazi, T., 2017, ‘Chapter 10: The Case of Renationalisation’ ‘Reclaiming the State, Monetary Sovereignty: A Primer, Pluto Press, Archway Road, London. pp 255 – 259

There is tremendous scope for a progressive agenda to eliminate debts, unearned incomes, nationalise the banks and have them work for a public purpose. This could look like:

1. Forgiving student debt, excessive credit card debt (wages have been low for so many workers many survive off credit)
2. Removing interest paid off all home mortgages and setting the rate at 0
3. Putting in strict rules around loan to income ratios (keeping the cost of housing affordable)
4. Having non-recourse loans in place for investment properties. So if properties are sold for less than what was paid, the bank takes the hit.
5. Instituting a policy of having The Federal Government purchase empty places as well as building what is needed to have Guaranteed Housing accessible to all.
6. Tax changes such as taxing economic rents at a higher rate than wages.

The beginning of this post looked at the intrinsic nature of how credit is created. Using that as a lens brings up a lot of different policy options that under an incorrect frame seem unachievable.

There is no real cost to cancelling debts, you change some numbers in a spreadsheet and people then owe less from their wages. There’s a moral question to ask as to whether a private institution should be allowed to issue credit and have so much control over the control of how and where we allocate real resources, why we allow them to have control over our lives and take a portion of our wage (by being able to charge interest because of a privilege our laws give them).

© Jengis 2020