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The Commonwealth Bank Act 1945 repealed the previous Commonwealth Bank Act 1911-1943 and recreated it as a central bank.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.

The Mainstream are Trying to Stay Relevant

I’ve read a few articles over the last few days that discuss full employment and how we voluntarily keep hundreds of thousands unemployed. It is a welcome change to the doom and gloom messages we have paraded about debts burdening our grandchild or insolvency if we spend too much. That narrative should be well and truly dead! I recall asking myself questions on what government debt is and why does a government need to borrow if it issues the currency in my senior years of school as I stared outside the window wishing I could be doing something more exciting.

This article from the ABC has Ross Garnaut plugging his latest book. The article details what economist call the Natural Accelerating Inflation Rate of Unemployment (NAIRU) Apart from being completely useless as a metric to measure against because you can never know what it is until you get there, it is still being used as a framework amongst the mainstream.

“Professor Garnaut says Australia’s policymakers have repeatedly miscalculated the NAIRU in recent years, meaning they have often suspected the economy is getting close to full employment when it is far from that point.”

So the fallacy that our economic superiors have just made a horrible mistake and needlessly left hundreds of thousands without jobs is paraded over the more accurate description that Unemployment is a political choice. Currency issuing governments can always purchase what is for sale, including idle labour. When economist think about costs (actual economist, not the frauds you read in the mainstream media) They are refereeing to real resources. People, raw materials, physical infrastructure, social impacts etc…And the cost of unemployment always far outweighs the cost of inflation. There are serious consequences as a result of involuntary unemployment. Loss of income, social exclusion, physical and mental health impacts, relationship breakdowns, poverty.

The mainstream narratives of deficits being a negative continue…

“At current levels of economic activity, having several hundred thousand people unnecessarily unemployed holds annual gross domestic product [GDP] down about $50 billion below what it could be, and, all other things being equal, raises Australia’s public deficits by nearly $20 billion each year.”

The deficit itself is irrelevant in determining a governments ability to spend. It is the residual number and accounts for the savings desires of the non-government sector. As an accounting rule it has to equal the non-government sectors savings. The question we should be asking is whether the fiscal balance is enough in achieving full employment and whether we have organised ourselves in a way that serves a public purpose. That is how much of the labour force do want engaged in public provision, what are the services we want delivered and what do we leave to private enterprise?

The article then continues to describe bond issuance and whether the Government should allow ‘the market’ to ‘fund’ deficits or whether The Reserve Bank should ‘fund’ the deficit spend. I wrote why that thinking was wrong here. I’ll reiterate parts of it below.

The Australian Government spends via an appropriation bill (through the parliament) and the finance minister then approves the transaction and someone within the Department of Treasury uses a computer to mark up the relevant exchange settlement account (ESA). These are accounts that financial institutes hold with the RBA. The smokes and mirrors of issuing bonds is irrelevant to the spending operation.

Intrinsically for a financial institution to purchase a bond the ESA’s have to be marked up first. So the act of issuing a bond changes the portfolio mix within the RBA’s system. ESAs are drained and dollars are added to a securities account. (The latter earns interest)

Now that the RBA is purchasing bonds it effectively owns the ‘debt’ that the Treasury is issuing so the Treasury can pay the RBA (via an appropriation bill) who then pays it to the Treasury. *eye roll* The whole operation is a charade to confuse the masses that all this somehow matters and great minds are at work pondering over these dilemmas to help save humanity.

Garnaut does state “I’d say, let’s take away their free lunch.” Huzzah! stopping the issuance of government debt is sensible. It is an unneeded operation that has its origins under a gold standard and necessary within the Bretton-Woods system. (a discussion for another time)

However Garnaut shoots himself in the foot and shows his interest in maintain the current class structures.

“The circumstances call for an Economic Stability Board, with power to constrain demand by fiscal as well as monetary means — to place a surcharge on major taxes if that serves better than raising interest rates.”

‘Independent boards’ are usually a mechanism to depoliticise a process the minister would rather not be responsible for and take away democratic accountability.

Under Garnaut’s thinking this operates under a NAIRU paradigm. The ‘independent’ board would have the power to raise and lower taxes (as well as interest rates) if it felt the employment rate and wages growth was too high or low and it would force the unemployed onto a substance payment in their pursuit of a desired rate of inflation.

“Professor Garnaut has also thrown his support behind the idea of a guaranteed basic income for practically all adults, paid at the same level as the dole

Basic incomes should not be part of a progressive agenda. (Though we need a welfare system that cares for those in need)

We are more than just consumption units and there is value in contributing within our abilities. We should be aiming to eliminate involuntary unemployment and underemployment.

A Job Guarantee scheme forms a replacement for the NAIRU and replaces it with a Non Accelerating Buffer Employment Ratio (NAIBER). The social policy manifestation of the NAIBER is the JG.

It serves the purpose of disciplining an inflation rate to a politically acceptable rate (Would you be bothered if inflation was 4% and you had less people in a JG over a 3% inflation rate?)- It isn’t ideal but it is a hell of a lot better than using an unemployed buffer stock. It isn’t there to create masses of minimum wage jobs.

It is the role of Government to use their spending capacity to create career public service jobs and act as competition to the private sector; eliminating lousy employers by ensuring enough high paid career positions matching people’s skillset are on offer.

The linked to article above and Garnaut’s mention of an independent fiscal and monetary board reminded be of the 1924 amendments to the Commonwealth Bank Act. A friend told me not everybody reads various pieces of banking legislation and their amendments from a century ago, so I will describe it here.

By 1923 under the Bruce Government (Nationalist), the responsibility for note issuance was transferred to the Commonwealth Bank (previously under Treasury) and maintained in the note issuance department. Changes were made to the Commonwealth Bank Act 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.’

The Governor of the board was a banker by the name of Sir Robert Gibson. A staunch deflationarist (wage cuts, cut deficits) and was responsible for inviting another banker Sir Otto Niemeyer to Australia over the Great Depression. The Sydney Morning Herald reported regarding the changes to the board ‘ …the board, although permitted to decide all other questions by a majority of votes, will not be allowed to determine questions relating to the note issue unless the determining majority includes two of the following, namely the Governor, the secretary to the Treasury, and the two directors appointed because of their knowledge of the currency’ (SMH, 14/ 6 /1924:15-16) The Governor wasn’t required be answerable to the Government of the day unless legislation compelled them. (Which didn’t exist) And unless the ‘radical’ Labour Party was in Government and controlled both houses this was an improbability. A constraint that we will witness over the depression when the Scullin Government tries to spend and lower the unemployment rate.

At the request of Gibson to observe the current Australian economic situation, Otto Niemyer, an official from the Bank of England along with Professor T.E. Gregory of the London from the School of Economics arrive in Australia on 14 July, 1930. Niemeyer  had tabled the below plan that was rejected by most Australian economists across the political spectrum.   

The Niemeyer plan (Parliamentary Papers 1929-31, vol.2, No. 81, p. 45) called for 1. Budgets to be balanced at any cost in human suffering. 2. Cessation of overseas borrowing until the then short-term  indebtedness had been dealt with. 3. No public works, which would not pay for interest and  sinking funds on loans, to be put in hand. 4. All interest payments to be credited to a special account  in the Commonwealth Bank, to be used only in favor of  the bond-holders. 5. Monthly accounts to be published in Australia and overseas, showing summaries of revenue and expenditure, also state of short-term debt and loan account.  

As the Labour Government of Scullin was wrestling with The Depression the note issuance board was denying the Government additional expenditure. In March of 1931, the Treasurer presented to The House a bill relating to the issue of a fiduciary currency. 

These fiduciary notes were to be called Treasury Notes as opposed to an Australian Note (notes issued under the Commonwealth bank act 1920 in pursuance of the Australian Notes Act 1910-1914) and differed in that there was no need to hold gold reserves in relation to their note issue. The Bill specially stated ‘Treasury Notes shall not be deemed to be Bank notes within the meaning of the Bank Notes Tax Act 1910’

The bill also made provision for Treasury Note issuance of £18million, six million of which was for the purposes of the Wheat Act 1931 and the remaining twelve million on providing employment for reproductive works.  These ‘reproductive works’ would be made by appropriations of any Acts or by means of loans to the States, local governments or other corporations approved by the Governor General.

During the second reading of the bill Australian Labor Party member for Bendigo, Richard Keane stated ‘This Government has made endeavours to obtain money, but has been thwarted in its attempt by the Commonwealth Bank and other authorities’ (House of Representative Hansard, No.13, p.577, 1931)

The Commonwealth Bank Act in 1924, as described above, had put in place approval of note issuance (and thus the ability for Treasury to spend without borrowing) to a seven member board.

With The Depression and many unemployed the Labor Government was looking for a means to directly decrease unemployment.

‘In this country we have an army of unemployed totalling about 300,000; loan expenditure has been reduced from £43,000,000 to £14,000,000, and the Government last year made a grant of £1,000,000 for the relief of unemployment.’ (House of Representative Hansard, No.13, p.578, 1931)  Keane makes mention ‘We on this side of the House take the view that, orthodox methods having failed, it is necessary to adopt what may be regarded as unorthodox proposals.’ and points to ‘…the fact that for many years Great Britain has had Fiduciary issue of £260,000,000’ (House of Representative Hansard, No.13, p.577, 1931) 

Theodore’s efforts on a Fiduciary Note failed in the Senate. Economist in Australia, despite the rejection of the Niemeyer Plan still necessitated wage cuts were necessary. Yet at the February 1931 Premier’s conference there was such disagreement amongst economist who were in charge of tabling a report it was never released to the public.

The Treasurer E. G. Theodore and Scullin repudiated the report: they would not have it signed by their public servants. Gibson then refused to sign it. The report was never issued. (Coleman, 1959, p.119) [Gibson was an economist within the Australian Government that would come round to the emerging Keynesian consensus rested by his collegaues]

With Theodore’s Fiduciary Notes bill thwarted, The Copland Plan was devised.  The Plan though proved unpopular with the electorate. 

It recommended a reduction in the deficit from £39m to £11m, to be secured by a £13m reduction in outlays, £12m increase in taxes, and £3m from reduced interest. There was to be a 20 per cent cut in expenditure, and a 15 per cent reduction in interest payments.….

…a deal specifying how the pain would be shared out; it sought to establish agreement by observing measures of equality of sacrifice. Australian bond holders, public servants and pensioners were all to take a cut. (Bond holders experienced the heaviest proportionate contraction in incomes: legislative fiat reduced interest on government debt by 22.5 per cent.) This universal sharing of the pain made it universally unpopular. (Coleman, 1959 p.120)

Figures within the ALP such as Curtin argued Labor should surrender Government rather than implement The Copland Plan. Though the plan was adopted. The Labor Party split and delivered a majority Government to Joseph Lyons United Australia Party (UAP), a key figure responsible for orchestrating the failed bills, leaking information to London financial interests, and leaving the ALP to assist in forming the UAP. 

The events of the economic malpractice continued and the Australian population was forced to endure the 1930’s with unnecassary levels of unemployment. As economist argued over how much to cut spending and wages by or whether to increase public expenditure masses of people needlessly suffered.

The ‘independent’ board under Gibson responsible for the note issuance desired real wage cuts and had no concern for the well being of the population! That is very well articulated in the Niemeyer Plan and we needn’t experience anything that atrocious again!

Read Chapter 6 of Giblin’s Platoon by Coleman et al., for an account of the economic disagreements that ensured over the 1930’s


So as the mainstream economist try to stay relevant by saying ‘Oh hey turns out there isn’t a need to issue debt’ despite the messages they’ve been pushing on balanced budget nonsense for decades. They’re trying to maintain current pools of unemployment and using them in a fight against inflation by offering them meagre subsistence living instead of what we desire, a job that is meaningful and allows us to contribute to society. All while attempting to ensure we have depoliticised technocratic bodies instead of democratic accountability. That doesn’t work for the EU and it won’t work here.

This article was on edited on 29/03/21 to fix a grammatical error.

History of Australian Currency – More Detail

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;

  1. 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.  
  2. A number of short-term loans at interest were made to  the States.  
  3. 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. 
  4. 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!

A History of Australian Coinage and Note Issuance- Part 1

This is a project I’ve been working on tracing the legislation that has created Australian currency. There is information a colleague and I are uncovering on a 1893 Queensland Notes bill, that was the model used on The Australian Notes act.

The early days of federation money was defined as British or Australian coins – with specified ratios of gold, silver and bronze. The introduction of Australian Note issuance banned private promissory notes and allowed the Australian Government greater spending power by only requiring the government to hold 1/4 of the notes on issue in gold reserves.

There was opposition to the Fischer governments plan to introduce Australian notes with Mr Kelly, the member for Wentworth stating

“It seems to me like breaking a butterfly on a wheel to put the forms of the House to this test in order that we may be able to argue whether we should defray the cost of setting up a printing mill for shinplasters….”

A shinplaster is a banknote or promissory note with little or no value. These are similar arguments used today to demonise public spending. These comments where in relation to the requirement to keep less gold in relation to note issuance – though the subtext is in ending the private banks ability to profit from their unchecked ability to issue bank notes.

I’ve detailed the legislative history through 1909 – just before 1920 when the Commonwealth took over note issuance.

I also hope to write on the history of Treasury Bills – These were issued at interest via the colonies and the newly formed Commonwealth Government and served different purposes throughout history depending on the make up of the legislation. But more on that another time….

This is a draft of the early stages of a larger project where I hope to show an overview of Australian currency history from a Chartalist perspective.

The aim is to demonstrate the history of Australian currency has been ‘tax driven’ looking through various legislation and detailing the history of currency issuance, its link to taxation,  the history of banking and credit issuance and the establishment of central banking from an Australian perspective. 

While different monetary systems have been in effect from the gold standard, the Bretton-Woods system of fixed exchange rates and now a fiat currency, these have been institutionalised arrangements.  Australian currency and credit has always been subject to instruments of the state.

Keynes (p.4 1930) In his treaties on money is influenced by the earlier works of Innes (1913) and Knapp (1924) 

The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least.”

Lerner (p.313 1947) on gold  writes “Its [currency] transformability into gold and the guarantee of this possibility of gold backing are nothing but historical accounts of how acceptability came to be established in certain cases. These were possibly the only ways in which general acceptability could be established prior to the development of the well organised sovereign national states of modern times.”

Australian currency has its origins in the Coinage Act of 1909. Section 5 of the act created legal tender;

Legal tender

Cf. ib. s. 4.

5.—(1.) 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—

While section 6 prohibited other coinage;

Prohibition of other than official coins.

Cf. 33–4 Vic. c. 10 s. 5.

6. 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.

The schedule within the act specified the dimensions and volumes of metal required in the minting of coins. These schedules were revised in 1936 and 1947 to change the ratio of gold, silver and bronze within the makeup of coins. 

In 1910, with hostilities from the opposition the Labor Fischer government passed the Australian Notes Act of 1910.  The member for Wentworth, Mr Kelly objected with the following statement.

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

It was common for states and the newly formed federal government to issue treasury bills in order to obtain gold. This of course meant interest payments.

The Australian notes act provided for note issuance to be linked with gold reserves. Under section 8, disposal of proceeds of issue notes, part 2 reads;

Part of the moneys standing to the credit of the Australian Notes Account shall be held by the Treasurer in gold coin for the purposes of the reserve provided for in section nine of this Act. 

While the gold reserve is under section 9 of the act. 

Gold reserve.

9.—(1.) The Treasurer shall hold in gold coin a reserve as follows:—

(a) an amount not less than one-fourth of the amount of Australian Notes issued up to Seven million pounds; and

(b) an amount equal to the amount of Australian Notes issued in excess of Seven million pounds.

(2.)  In ascertaining the amount of Australian Notes issued, the amount of Notes which have been redeemed shall not be included.

Notes that had been redeemed (taxed) were no longer necessary to link to the nation’s gold supply effectively deleting the currency from existence.  This meant the nation’s note issuance was tied to the quantity the Australian government held in gold.  Note issuance below seven million pounds required a quarter to be held in gold reserves while anything over seven million required full gold reserves.  

Furthermore 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 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

The responsibility of note issuance now solely rested with the Treasury. Just after 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. 

Amendment of s. 9.

2.   Section nine of the Australian Notes Act 1910 is amended by omitting sub-section (1.) therefrom and by inserting in its stead the following sub-section:—

“(1.) The Treasurer shall hold in gold coin a reserve of not less than one-fourth of the amount of Australian Notes issued.”

During the second reading to the house Mr Fischer 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 commentary continues that the act’s intent isn’t to stop private credit issuance of the banks.  

It is not intended to prohibit the banks from issuing notes, but a charge is made on all such notes issued, and the money placed to the credit of the community. Heretofore the private banks practically had the unlimited right to issue notes free of charge, and the State was expected or asked to “guarantee these notes in times of crisis. The Government proposal is safeguarded. 

House of Representative Hansard No. #32, p.1228

Curiously, the Australian Notes Act 1910 prohibited the circulation of State and Bank note issuance

No State Notes to be circulated after a proclaimed date.

4.—(1.) From and after six months after the commencement of this Act—

(a) a bank shall not issue, or circulate as money, any note or instrument for the payment of money issued by a State and payable to bearer on demand; and

(b) a note or instrument for the payment of money issued by a State and payable to bearer on demand shall not be a legal tender.. 

Quite clearly, the Commonwealth Government was looking to be the sole monopolist of note issuance within  the newly formed federation and to stop the issuance of notes from banks. On 10th October 1910,  after  the passing of the Australian Notes Act on 16th September, the Fischer Government passed the Bank Notes Tax Act 1910

Imposition of bank note tax.

4.  A tax at the rate of Ten pounds per centum for each year (including the year in which this Act commences) is imposed in respect of all bank notes issued or re-issued by any bank in the Commonwealth after the commencement of this Act, and not redeemed.

The changes in the legislation from 1920 onwards detail the Commonwealth Bank takeover of note issuance in 1920 with changes to the legislation in 1929 that allowed the government with written notice return holdings of gold to the Commonwealth as well as banning the export of gold.

The changes in 1929 are juxtaposed against the attempts of some within the Labor Party to establish a central bank (that forces financial institutes to hold accounts with the central bank) and the failed Central Reserve Bank Bill in 1929-30 and the Fiduciary Notes Bill of 1930-31. (Fiduciary note isn’t linked to gold)

It appears the 1929 changes as well as changes made to the Commonwealth Bank Act in 1931 and 1932 to allow for a reduction in gold reserves and allow for English Sterling to be used as reserves were concessions to the failed bills.

This the same era when the ALP had their three way split, Lyons formed the United Australia Party, with other fiscally conservative MPs. The result of limiting spending prolonged the depression.

Jack Lang who was dismissed as Premier of NSW, advocated for abandoning the gold standard and replacing it with a ‘goods standard’ went on to form Lang Labor.

I hope to detail the above events in more detail as well as the ascent of the Commonwealth Bank Act 1945 that created it as a central bank, rescinding the Commonwealth Bank Act 1911-1943.

The 1945 Act makes no mention of needing to keep reserves in relation to note issuance and it was the same time as the world established the Breton-Woods system of fixed exchange rates. Australia was officially off a gold standard.

It wasn’t until 1965 that Australia abandoned the final vestiges of the gold standard with its introduction of the Currency Act brought in the Australian dollar and rescinding the coinage act of 1909-1947.

Currency Issuing Governments Finance Themselves

There have been a lot of stories in the media around the debt and the ‘cost’ future generations will bear as a result of the spending required during the covid-19 crisis.

Each and everyone of these sports the same neoliberal garbage that taxes need to rise and suggest tax changes that work in favour of capital. Some more left leaning economist state things like we will to ‘invest’, in a financial sense, as a nation and ‘value add’ to our exports or we ‘borrow against future productive capacity’. This language is tied up in the neoliberal assumption governments need to find tax dollars in order to spend or need bond markets to borrow from.

For reasons perhaps of ignorance, it appears financial commentators haven’t yet grasped there have been different types of currency systems. There has been a gold standard, a system of fixed exchange rates, and fiat currencies, the latter of which we operate under today.

There were a number of economists during the mid-twentieth century that expressed under a fiat currency we were not restricted by tax collection. The below is a quote by Chairman of the NY Federal Reserve in an article from the American Affairs Journal.

The necessity for a government to be prepared to tax in order to maintain both its independence and its solvency still holds true for state and local governments, but it is no longer true for most national governments. Two changes of the greatest consequence have occurred in the last twenty-five years which have altered the position of the national state with respect to the financing of its requirements. The first of these changes is the gaining of vast new experience in the management of central banks. The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold or into any other commodity.

Ruml, B. The New Economic Insight, American Affairs Journal 1950

Under a gold standard governments promised gold in exchange for their currencies. The standard was adopted by the UK in 1844 and was the system used up until WWI. Countries would express the ‘value’ of their currencies in terms of gold. $1 may equal 30 grams of gold. The monetary authority could set it at whatever it liked. Domestically it needed to ensure sufficient gold reserves to back the currency in circulation.

It was the principle method for making international payments. Trade deficit countries would have to ship gold to trade surplus countries.

Say NZ ran a current account deficit against Australia. NZ would literally ship the equivalent gold on ships to the surplus country. This would have effects on the money supply expanding (without an increase in productive capacity) and the loss of gold reserves for the trade deficit country would force a country to withdraw currency domestically (decrease spending/increase taxes) which is deflationary and cause unemployment and falling output.

The economist Bill Mitchell described the system as such

This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline.

From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved.


During the gold standard era countries balanced their external account (trade or what call today the current account) to maintain their gold reserves. In the meantime trade deficit countries experienced domestic sessions and rising unemployment.

WWI interrupted in the gold standard and currencies were valued at whatever each country wanted to set it at. Some tried a return to the gold standard – some floated their currencies – the USA had a floating exchange rate in 1945 before deciding to go with the Bretton Woods System in 1946.

After the WWII (where countries abandoned the gold standard) Western countries formed the International Monetary Fund and created the Bretton Woods System.

This was a system of fixed exchange rates. Rather than convert directly to gold, countries converted their currencies to US dollars and the US government would convert $USD35 to an ounce of gold.

This was the nominal anchor for an exchange rate system. Countries would then build up USD reserves. If running trade deficits, they would intervene in foreign exchange markets to ensure their currency remained at the agreed parity (running down US dollar reserves) Other options would be to reduce imports (usually via tax cuts/decreased public expenditure to cut spending), increase exports (a loss of a real good or service) or alter monetary policy (interest rates) to attract foreign investment.

Monterey policy was about helping target the agreed exchange parity. It meant fiscal policy (in contrast to a fiat currency) was more restricted.

The fixed exchange rate system however rendered fiscal policy relatively restricted because monetary policy had to target the exchange parity. If the exchange rate was under attack (perhaps because of a balance of payments deficit) which would manifest as an excess supply of the currency in the foreign exchange markets, then the central bank had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs).

This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of $USD reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities. The system was politically difficult to maintain because of the social instability arising from unemployment.

So if fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion. Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities. They could revalue or devalue (once off realignments) but this was frowned upon and not common.


Let’s take a step back in time and look at the history of The Bank of England. This was the world’s first central bank. Created in 1694 . The BoE website says

The Bank of England began as a private bank that would act as a banker to the Government. It was primarily founded to fund the war effort against France. The King and Queen of the time, William and Mary, were two of the original stockholders.


One could make the assumption the reason for private bankers holding shares in that original entity was to profit every time the government spent. There would be an accounting arrangement whereby the Treasury issued gilts (we call them bonds, treasuries or securities) the BoE would hand over £ and the bankers in turn would ‘own’ the government debt collecting the repayments. The bank was always governed under Government legislation and it was nationalised (removing the private stock holders) in 1946.

Pre-1844 any private bank could issue their own banknotes. Customers would deposit gold in a private bank and receive a ‘note’ that specified the amount. It was until 1725 that the BoE began to issue their own partially notes for amounts of £20 and upwards. These partially printed notes increased in denominations of £10, up to £90 and a bank cashier could increase the value of the note in writing by a maximum of £9 19s 11d

For the uninformed there were 12d to a shilling and 20s to the pound. You could further divide pence into farthings and there were 4 farthings to the pence. For the sake of staging it the (d) symbol for pence comes from the Roman ‘denarius’ a coin used in the Roman Empire.

Up until 1844 private banks had the ability to issue their own notes. The Bank of England began to open its own branches in 1826 as a result of banking crisis in the 1820’s that saw many country and provincial banks fail. The BoE website states:

One of the main reasons for establishing branch banks was to enable us to take further control of the banknote circulation, in order to prevent another crisis.


In 1844 (the formalisation of the gold standard) the UK Parliament introduced The Bank Charter Act which formalised the issuance of banknotes in the UK. It started to place restrictions on private banks issuing their own notes and stopped new banks from issuing their own notes.

In 1931 the BoE suspended the the Gold standard as confidence collapsed as a result of the depression, the Bank lost much of its reserves. The simplest way to spend when you don’t have gold in a currency system backed by gold is to remove the gold standard.

Governments that issue their own currency have always been able to finance themselves, even under a gold standard. Over the period of WWI the BoE issued war bonds to ‘finance’ the war. The public didn’t buy enough war bonds and the BoE used its own gold reserves to purchase treasury war bonds. I suppose this was to remain the rouse that governments are ‘borrowing’

In January 1915, the Treasury prohibited the issue of any new private securities without clearance, and UK investors were banned from buying most new securities (Morgan (1952)).  As the war dragged on, and capital became increasingly crucial to the Allies, the net would tighten further. And this episode was to be the first of several instances during the war where the Bank used its own reserves to provide needed capital.


Over the period 1797 – 1821 the UK entered a period known as ‘The Restriction’ As a result of the panic over the war there was a rush on withdrawals of gold and the BoE reserves depleted by £14 million. They suspended the convertibility of gold as they entered a war with France.

To try to preserve the already depleted gold reserves, the Prime Minster, William Pitt the Younger, placed a Privy Council Order on the Bank of England, ordering it to stop paying notes in gold.


The power of the state by legislation ended a system that restricted supply of currency to gold and by legislative fiat they had a free floating exchange rate giving them the capability to invest in their productive capacity. In this case to fund war efforts against Napoleon.

A fiat currency is a currency that a government issues is not convertible (to gold) and floats it on foreign exchange markets.

The float allows a government to target domestic policies such as full employment without the need to worry about ensuring the exchange rate remains at an agreed parity. It means rather than needing to find foreign currency to purchase back its own currency to defend the exchange rate, it is the exchange rate that takes the hit. It means it doesn’t need to ensure gold reserves to the currency in circulation.

The modern fiat currencies began when Nixon ended the Bretton Woods System in 1971 and no longer promised gold in exchange for US dollars. Australia floated its dollar in 1983.

You can appreciate that under previous regimes like the gold standard, taxation ensured the spending the government did was offset to ensure the currency in circulation was in line with the supply of gold. Under a fiat currency the obligation to watch a gold supply is no longer there. The government can purchase whatever is for sale in the currency it issues. There is no need to find gold.

These types of monetary regimes are different. There is no point applying ‘gold-standard/fixed exchange rate’ thinking to a modern day fiat currency. Under a fiat currency a governments limit to spending is limited by the available real resources. There is no need to defend an exchange rate or maintain a gold supply.


Over the 19th century The British Government (through its agent the BoE) started to crack down on private note issuance (under a gold standard) to stop prevent financial crisis. Similar things where done in the USA and Australia to ensure ‘integrity’ of the financial system. It was the nation state that held power (and still does) not the financial sector and private bankers.

Australia used its wartime powers to establish a central bank and forced financial institues to hold exchange settlement accounts with the Commonwealth Bank (and in 1959 handed the role over the newly created Reserve Bank of Australia) This allowed the Commonwealth Government to have control of monetary policy (the overnight interest rate).

Broadly speaking we can divide monetary systems into two types

  1. Gold standard/fixed exchange rates – where governments promise a commodity (such as gold) for a fixed value or they agree to maintain a particular exchange rate. These systems place institutional restrictions on governments spending because they have agreed or promised gold or a foreign currency in exchange for their currency of issue.
  2. Fiat currencies – these allow governments to spend up to the productive capacity of the economy.

Today treasury departments have accounts with their central bank. There is usually an institutionalised accounting arrangement where by when the government taxes the equivalent tax collection is marked up in the ‘offical account’ if the account is short a department within treasury will auction bonds to make up the difference between what it has taxed and what it has spent. However, bonds can only be purchased with reserves which are the result of previous deficits.

The flow (deficit) is then represented as a stock (debt). Under current institutionalised arrangements you can view the debt as every dollar that has been spent and not taxed back. It is the savings of the non-government sector.

The British government through this crisis has done away with the bond market and have used Ways and Means facility (W&M)

The Ways and Means (W&M) facility functions as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.


Sovereign currency issuing governments would all have overdraft facilities with their central banks. But why go through the rouse of pretending a currency issuer needs to find funds. Combine the operations of the central bank and treasury and credit the relevant bank account and do away with the bond market all together. All reserves within the financial system are a result of government deficit spending as it is. Why hand out corporate welfare?

Hopefully this little bit of history can help you understand how different currency systems operate and see that the a currency issuing Government can do away with the bond market all together.

© Jengis 2020

The Story of Money

It’s been a while since my last post. Writing a blog is much more intensive than I had anticipated. I have a new appreciation for anyone that can put out content on a regular basis, while maintaining a full time job and other commitments. I am endeavouring to post more frequently.

I recently had an interview on community radio 3CR based in Melbourne. The topic was “The Story of Money” and dealt with how currency did not evolve out of barter but always was a ‘creature of the state’. We attempted to break down many myths about how a country with fiat currency operates. The radio interview went to air last Friday and a podcast is available here.

One of the interesting things I’ve learned through studying the history of currency is how it functioned. Michael Hudson discusses the origins of money and interest over the Neolithic and Bronze Age as a provision of credit and not that as a system of barter that is commonly told.

“As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle.”


Once you understand that all ‘money’ is a liability or a debt (the numbers you see in your bank account are a liability for the bank and the numbers in your bank’s account at the central bank are a liability of the currency issuer [whom can always make payment]) you can understand how money came to be.

The origins of these accounting practices can be found in the Kingdom of Sumer. Sumer was a kingdom in Mesopotamia settled by humans around 4500 to 4000 B.C. The area is where strides in agriculture, textiles, carpentry, pottery and fermentation happened. The Sumerians were in control of the area by 3000B.C and their society was compromised of city states. Hudson writes

The origins of monetary debts and means of payment are grounded in the accounting practices innovated by Sumerian temples and palaces c. 3000 BC to manage a primarily agrarian economy that required foreign trade to obtain metal, stone and other materials not domestically available. 


This system of accounting was used to forward plan and ensure food, textiles, and housing for the population. It was large palatial institutions designed a system to keep track of the stocks and flows of production and trade.

…The first need was to assign standardized values to key commodities. This problem was solved by creating a grid of administered prices, set in round numbers for ease of computation and account-keeping. Grain was designated as a unit of account to calculate values and co-measure labor time and land yields for resource allocation involving the agricultural and handicraft sphere, as well as the means of payment. 

The second need of these large institutions was to organize means of payment for taxes and fees to their officials, and for financing trade ventures. Silver served as the money-of-account and also as the means of payment for trade and mercantile enterprise…


In my very first blog post I described the State Theory of Money where the work of Alfred-Mitchell Innes stated “Validity by proclamation is not bound to any material” That is a currency doesn’t have to be backed by any material but it derives it’s value because of the tax liability placed onto the communities in that society.

One way to understand taxes drive demand for a currency is to look at the experiences of European colonisation of African Nations that compelled Africans to provide goods and services to their European colonisers in exchange for the currencies the colonisers issued.

Prior to colonisation the Indigenous populations were non-monetary based societies engaged in substance living, largely could produce enough to provide for their communities and engaged in some internal trade. There was no reason to desire a European currency or any currency for that matter.

The excellent book by Sticher, Migrant Laborers (African Society Today) published in 1985 describes the imposition of a hut tax in Malawi being imposed by the British colonisers.

….imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings]. In the south of Malawi, however, Africans preferred to meet the tax by [selling products]. Southern [European] planters therefore were short of labor and pressed for an even higher tax. As a result the tax was raised in 1901 to Sh.6, with a Sh.3 remission for those who could prove they had worked for a European for at least one month. This ‘labor tax’ had an immediate effect. The labor market in the south became flooded… Taxation, then, if it were high enough…could force men into wage earning

Taxation as a method of forcing out laborers but it did not distinguish between the various sources of the cash. Most Africans who could simply sold produce or livestock [to Europeans at administered prices] in order to pay the tax. But where Africans were poor in items to sell, or were distant from markets, taxation could produce laborers

Stichter, Sharon. Migrant Laborers. Cambridge U. Press, 1985. p26 – 28

The evidence is rather clear that from the Bronze age the early kingdoms devised a system of credits and debits to keep track of production and all the way to modern times it is the imposition of a tax liability that derives the value and demand of a currency.

Markets are then created post the tax liability and the spending. Polyani’s book ‘The Great Transformation: The Political and Economic Origins of our Times’ explains the market not as some natural state and economic rationality and market mechanisms for providing the basis of organisation, rather a market is based on communal patterns of organisation tied to our social structures.

The performance of all acts of exchange as free gifts that are expected to be reciprocated though not necessarily by the same individuals–a procedure minutely articulated and perfectly safeguarded by elaborate methods of publicity, by magic rites, and by the establishment of ‘dualities’ in which groups are linked in mutual obligations–should in itself explain the absence of the notion of gain or even of wealth other than that consisting of objects traditionally enhancing social prestige. . . . But how, then, is order in production and distribution ensured? . . . The answer is provided in the main by two principles of behavior not primarily associated with economics: reciprocity and redistribution. 

Polyani, K. The Great Transformation: The Political and Economic Origins of Our Time, Beacon Press 1957 (reprint 2nd Edition 2001)

Much of the orthodox text uses nonsense theories about human behaviour and rational expectations which attempt to ‘demonstrate’ that markets themselves find equilibrium and are self correcting. The empirical or anthropological evidence holds these theories to be nonsense. Exploring the concept that money evolved out of barter and ‘disrupted’ the market causing the system not to be able to correct itself is common amongst the orthodoxy that Government intervention should be kept to a minimum as it disturbs the ‘natural’ state of markets and the economy.

Thinking about a common problem, unemployment, the orthodox framework describes it as a problem of the individual and we have a framework of ‘full employability’ where we push the unemployed through ‘training’ because they aren’t skilled enough to have their labour demanded. The issue isn’t a lack of jobs per se but that the unemployed haven’t gained enough skill to have their labour in demand and have chosen leisure over employment.

The description above is of course complete bull. Anyone that views unemployment through a framework of an individual issue whereby the unemployed has chosen leisure over employment is clearly, in my mind, sociopathic.

Unemployment is always a result of insufficient spending. The imposition of a tax liability creates a demand for a currency, that spending sets the general price level and is used to purchase real goods and services created by the private sector into the public sector. Those that do not have the means to provision the government with a good or anyone else with the currency with a good need to sell their labour in order to obtain the currency and pay their taxes.

It is insufficient spending in aggregate that causes unemployment. Here it is important to realise taxation decreases someones income and thus the ability to spend is less causing further unemployment.

A view on what constituents aggregate demand is important. National Accounting statistics describe the sources of spending as; Government Spending, Consumption, Investment, Exports

The initial spend has to come from the currency issuer – this is Government Spending, the recipients of that income spend further and then those receiving income from that spending spend again – until such a state that a certain portion of the labour force is employed. Investment expenditure and Export expenditure is also income for someone or to some business and thus contributes to employment.

Within the cycle of spending there are what are called leakages – these are taxation, savings and imports. Taxes take away spending power, causing unemployment but allowing the Government to create the non-inflationary space to spend and acquire real goods and services. Savings and imports (which are a foreigners desire to save) is income not spent and thus can be thought of as contributing to unemployment. Keynes argued that Government Spending needs to equal full employment and the savings desires of the non-government sector.

Sectoral balances between the the Government and non-Government show that the Government deficit has to equal the Non-Government sector surplus. This is an accounting rule. If the Government spends 100 and taxes 30, we record that as a deficit of -70 but that +70 has to sit within the non government sector. It is income.

Unemployment is a result of insufficient aggregate demand (total spending) A currency issuer always chooses the unemployment rate. It is a political choice as the issuer of a currency can ALWAYS purchase whatever is for sale in the currency it issues. It uses the computer to mark up the size of a bank account and gives them a task to do!

Within an MMT framework a Job Guarantee is a superior automatic stabiliser (spending increasing/decreasing without a change in policy) that maintains ‘loose’ full employment and price stability. It is a superior inflation anchor than the current orthodox approach that uses unemployed to discipline the inflation rate. Spending at the bottom of the income spectrum can not be inflationary as inflation is excess spending beyond the productive capacity and the economies ability to absorb the additional spending. Purchasing the unemployed (those that have been rejected by the labour market, that is constructed from the Governments initial spend) can not be inflationary because there has been no competing bid for their labour. I’ll write in more detail on inflation at some future point.

The radio interview was a simplified explanation of the above. Many thanks to Anne for the edit making me sound coherent. It is an art form giving an interview.

It should be noted that the story of money is much much more complex. It involves different types of monetary regimes which you can divide into three types. A Gold Standard, Fixed Currency Exchange Rates and Fiat currency regimes. The latter is what we operate under today.

To further complicate things add a banking system to a monetary system and you have entities that are given license to issue credit and I dealt with this in my first blog post.

That is all from me for today!

(Not) A Green New Deal being proposed in Australia.

A new Greens Party leader in Australia was elected, and the party has run with the theme being used in the USA that we need a Green New Deal (GND). This is the new leaders article in the Guardian on a GND.

As well as an education in what the GND actually is, the economic framework that underpins a GND, the leader could also use some grammar lessons.

“Study hard and do Tafe or university and you get underemployed in an insecure job with low pay.”

The Greens party framework for a GND looks like existing Green policy badged under a new label. There isn’t much substantive change to existing policy, and the economics is still within a neoliberal framework. Which I’ll explain more about below.

I want to first start by explaining what the concept of the original New Deal was, the framework of a GND in the USA and its economic underpinnings and finally how the Greens proposals to date, do not amount to a concept in anyway similar to what is being proposed in the USA.

The original New Deal was introduced by Franklin D. Roosevelt in two stages. The first between 1933-34 which was about financial reform. E.g. the emergency banking act and the 1933 Banking Act. The second New Deal included the National Labor Relations Act – which allowed private sector employees to organise, collectively bargain and take collective action. The Works Progress Administration employed job-seekers to carry out public works. This included musicians, artist, writers and actors. It also employed people to build streets, bridges, dams etc…the initial appropriation in 1935 was equivalent to 6.7 per cent of GDP. (Smith, Jason Scott (2006). Building New Deal Liberalism: The Political Economy of Public Works, 1933–1956. New York: Cambridge University Press) It also included the Social Security Act, US Housing Authority, and the Fair Labor Standards Act. A lot of the WPA employment was temporary and designed to alleviate unemployment not eliminate involuntary unemployment.

The term ‘A New Deal’ was coined by economist Stuart Chase in a book of the same name. He used that book to articulate what he envisioned as ‘Goals for America’ which he summarised as the ‘Guarantee of the five essentials to every citizen – food, housing, clothing, health services, and education …’

He also had a book titled behind the dollars; Where he posed the question ‘Where will the money come from?’ and poses the questions of where Italy, Germany and Japan obtained money after having experienced depressions. You can read about Stuart Chase and a review of that literature here. The idea that ‘money’ was not an issue but the constraint was real resources was gaining recognition during the 1940s. Beardsley Ruml, the Chairman of the NY Federal Reserve in 1946 gave a speech ‘Taxes for Revenue are Obsolete’ In that speech Ruml outlines the purposes of taxation is to “stabilize the purchasing power of the dollar”, to “express public policy in the distribution of wealth and of income” and “in subsidizing or in penalizing various industries and economic groups”

The GND being proposed in the USA is advocated for by grassroots movements such as sunrise, that campaign for electing justice democrats that adhere to a new consensus.

The sunrise website states;

“The Green New Deal is a 10-year plan to mobilize every aspect of American society to 100% clean and renewable energy by 2030, a guaranteed living-wage job for anyone who needs one, and a just transition for both workers and frontline communities.”

Under paying for a GND new consensus says the following;

“The Green New Deal will be funded as all other ambitious American projects – including public works, bank bailouts, wars, and tax cuts –have been: through carefully targeted, Congressionally authorized spending. As the post-2008 consensus among serious economists and financiers affirms, this does not require “new taxes” unless inflation emerges. And since (a) well over $5 trillion in tax cuts and war expenditures in recent years have not triggered inflation, (b) the Fed is still struggling to get inflation consistently up to its 2% target, and (c) the Green New Deal will produce new goods and services to keep pace with and absorb new expenditures, there is no more reason to let fear about financing halt progress here than there was to let it halt wars or tax cuts.”

That style of thinking is straight from the school of thought known as modern monetary theory. ‘Paying for’ a GND is articulated in this paper. This article in the Huffington Post ‘Paying for a Green New Deal’ says;

“The federal government can spend money on public priorities without raising revenue, and it won’t wreck the nation’s economy to do so. That may sound radical, but it’s not. It’s how the U.S. economy has been functioning for nearly half a century. That’s the power of the public purse.”

If you don’t understand the economics, the framing of the programs that are included are based on a neoliberal economic framework that undermine the ambition within the framework.

The economy isn’t a seperate entity to society. The fiscal position of a government is merely an irrelevant statistical artefact. A currency issuer is never financially constrained, it spends by crediting a bank account. What matters is whether we have the real resources (raw materials, labour power, skills) to implement a desired agenda. The below quote is from the text book macroeconomics by modern monetary theorists, Bill Mitchell, Martin Watts, and Randy Wray.

“While we may think it is useful to separate ‘the economy’ from the rest of social life, and to apply ‘economics’ to the study of that area of life, we recognise that the division is necessarily arbitrary. In truth, there is no completely separate sphere of ‘economic life’, meaning that economics is linked to, and incorporates findings from, the other social science disciplines.”

The GND has it’s intellectual underpinnings as a new way of thinking about economics and uses that as a lens to advocate for Medicare for all and the elimination of all medical debt, transition to 100 percent renewable energy and create 20 million jobs, ensure a just transition for fossil fuel workers, invest in conservation, free colleges and the cancelation of all student debt, a series of pro union laws with a goal of doubling union membership in a Sanders presidency first term, housing for all with a huge reinvestment in social housing and a goal to end homelessness and ensure fair housing for all. I’ve taken that information from Bernie Sanders campaign issues.

You see similar thinking during the post WWII era where under a different way of thinking about ‘the economy’ (Keynesianism) the British Labour Party under Attlee in their 1945 ‘Let Us Face the Future’ manifesto listed things such as ‘Jobs for All’, ‘Agriculture and The People’s Food’, ‘Houses and the Building Programme’, ‘Health of the Nation and its Children’ ‘Social Insurance against the Rainy Day’

Now let us look at what The Greens Party in Australia is calling a Green New Deal. They haven’t specified what they mean by a GND so I’ve read the policy pages of their website. Adam Bandt in the article linked to in The Guardian has said;

With a Green New Deal, we can deliver a manufacturing renaissance, turning Australia into a renewable energy superpower exporting our clean energy to the world. At the same time, as Ross Garnaut has proposed, we can process our resources and minerals in Australia and attract new business investment because of our abundance of solar energy.

Whoever said an export led strategy was part of a GND? At the macro level an export is a loss. It is a real good or service a nation does not use because it ships it away. How do we ship the renewable energy overseas? Turning it into Hydrogen requires tremendous amounts of water on one of the driest continents on earth. Isn’t it far more efficient that foreign nations can produce renewable energy without relying on others?

Ultimately the wealth of a nation is its labour force and what it is able to produce. What it can’t produce, it has to import. That’s just simple logic. A currency issuer can always employ labour and afford whatever is technically feasible. A monetarily sovereign country can always afford full employment though that may not necessarily mean the country is materially prosperous.

The Greens policy on Renewable Economy and Climate Change is to:

“Phase out coal, move to 100% renewables and deliver cheap, clean and reliable energy for homes, businesses and industry” an amicable goal. Their policy on electricity is to Create Power Australia, a not-for-profit, public energy retailer for renewables” That is a market based mechanism under the idea that ‘a market’ can deliver resources efficiently’. You read the website in further detail and they say they will Buy back essential electricity infrastructure…That’s why the Greens will establish a Grid Transformation Fund – to restore public ownership to those critical interconnectors between states.”

They’re still stuck within a neoclassical economic framework. The Federal Government issues Australian dollars, it doesn’t need a fund to be able to purchase anything. It can always make a payment denominated in Australian dollars, and purchase anything for sale in that currency. Who said we should have to buy back what the public sector built and sold off cheaply, and allowed corporations to profit off. The Greens website goes onto say “Under our plan, energy bills will be reduced by an estimated $200 a year for an average customer, we’ll increase competition in the existing retail market and end the profit-at-all-costs business model.” I think that’s really lousy goal.

Here is an actual progressive policy. Create a situation where any private infrastructure is financially unviable for a private entity and take it back. We need massive investment in leaving fossil fuels and transitioning to renewables. Build it using public funding and have a policy of delivering a quota of free electricity to every household. Guarantee free electricity, water and broadband to every Australian household. This is entirely possible when you understand the federal government is not a household and can always deploy resources for a public purpose. It is not a question of ‘how do you pay for it?’ rather it is ‘how do you resource it?’

Continuing under the heading of ‘Renewable Economy and Climate Change’ The Greens state they wish to Provide support for coal workers and communities as we phase out coal’. Delving into further detail they go on to say “Under our plan, we will establish a specialised, independent Future of Work Commission. The Commission will examine the impacts of technological innovation and develop long-term strategies for jobs.”

That isn’t anything like a just transition being proposed in the USA that says they want “a guaranteed living-wage job for anyone who needs one, and a just transition for both workers and frontline communities.” A just transition would mean looking at the skill set within fossil fuel industries and the towns that are impacted and using that skill set (electricians, engineers etc…) in industries that aren’t based on fossil fuels. It means guaranteeing work without loss of pay as those workers transition into other industries.

Under World-class health, education and social services and ‘Support Payments‘ we have a policy that says “We will immediately raise Newstart and Youth Allowance by $75 per week”. The current rate of Newstart for a single with no dependants is $489.70 a fortnight or $244.85 per week. A $75 a week increase will have the rate at $319.85. The Henderson Poverty Line for the June quarter 2019 was $429.60 a week for a single person with no dependant children. That leaves an unemployed person $109.75 below the poverty line.

Furthermore unemployment is always a political choice. The Government can always purchase whatever is for sale in Australian dollars, including idle labour. The Government of the day chooses the unemployment rate it wants. When you look at what is being proposed in the USA around a Job Guarantee, and the academic literature around what it is, it is buffer stock mechanism, designed to eliminate involuntary unemployment and act as a price anchor.

A measly raise to the rate of Newstart and a Future Work Commission is admission of defeat that full employment would be nice to have but no longer possible. It takes a limited view of what we consider to be productive employment. Reading broader literature around a Job Guarantee we learn that it aims to redefine what we consider productive work.

“Many other people claimed that there are social services that are not considered ‘productive’ in the sense of profit-generating activities that, nonetheless, needed to be done—things like caring for the young, old and the frail, cleaning and fixing up the neighborhoods, running soup kitchen, and so on.”


Any ‘Green New Deal’ needs an understanding of the differences between a currency issuer and a currency user. It needs to understand that to tackle the climate crisis the currency issuing government needs to take a major role in transitioning away from fossil fuels and building renewables as well as using that transition to create a more equitable society. You won’t get that more equitable society or be able to invest in greater public spending unless you understand that it is never a question of whether a currency issuing government can afford to ‘pay for’ something, it is a question of whether the real resources are available. If they are, federal government spending is unconstrained. If they aren’t, how do you stop the private sector using those real resources in a way that is non-inflationary.

The Right to Work

I’ve finally finished the site design and colour scheme. It took me much longer than expected as it proved more difficult than expected. Alas, I have a final design. Today’s topic is a continuation from my post Full Employment Demise and is a history of ‘The Right to Work’

The right to work movement has its origins in the 14th century. Now a days, within a USA context, it is a term used for anti union laws under the guise of a right to not be a member of a union. They are laws designed to limit organising and collective power.

Work on a a lords land circa 14th century was usually for a subsistence living and the surplus value of your labour (literally your harvest) was the property of the lord. The peasants that occupied the land were not its owners. Agrarian property was controlled by a class of feudal lords. Their were limits on travel for working people, ‘Villeins regardant’ were usually granted plots of lands to farm for a subsistence and these plots along with those on them could be bought and sold. ‘Bordarri’ who were usually tradesmen/artisans were usually granted a cottage to live in exchange for their labour. Conditions of servitude were inherited and you were bound in perpetuity. Under capitalism the exchange value disguises the use value of your labour and the capturing of surplus value by the capitalist class is more opaque.

There was growing demand for wage labour (most likely because of the leaving of taxes demanded a necessity for the sovereigns currency) Waged-labour was more cost effective than feudalist servitude as it absolved the owners of needing to house and feed their workforce. There was less direct need for surveillance and motivation came from the workers needing to obtain income.

As waged-labour became more common there were a series of laws through Britain and the rest of Europe to preserve distress amongst the unemployed. The notion that it ‘built character’, ‘unemployment acted as a motivator and increased the productivity of the working class’, and it limited what the capitalist class saw as ‘excessive wages’ as workers competed for scarce work.

There were laws that under the guise of ‘providing for’ or to ‘assist’ the unemployed acted as a mechanism for forcing the unemployed to take any job at any condition. Elizabethan poor laws, such as the system of Speemhamsland, which was a sliding scale payment tied to the price of grain, designed to mitigate against rural poverty but ended up as a wage subsidy and resulted in increases in the price of grain, leaving the poor no better off.

There were also workhouses during the 19th and 20th century. The unemployed would be required to work in dangerous conditions, usually in a factory, for their below subsistence welfare payment. Conditions were often so pernicious, it resulted in death. It is similar to today’s modern day mutual obligation requirements under our welfare system. Welfare recipients are required to undergo Work for the Dole or Community Development Program (CDEP) for their below subsistence payment. It is mandatory and there have been cases of workers dying as a result of the conditions. The CDEP is often work for a private for profit corporation.

By 1848 during the Second Republic of France and the idea of a ‘right to work’ had gained traction having been popularised over the proceeding decade by Louis Blanc. The abolition of unemployment was a goal of the Parisian workers who had backed the Second Republic. ‘National Workshops’ were established where unemployed Parisian workers could show up and be paid. The scheme was contentious and had divided the cabinet, that resulted in a chaotic scheme. Many within cabinet wanted political reform not necessarily social reform such as the elimination of unemployment and wealth redistribution. The municipal engineers organising the work resented the use of unskilled labour. Often there was no planned work for the idle workers they would be paid one and a half francs a day to do nothing or two francs when work was given. The program started at approximately 14,000 workers and within half a year and expanded to 117,00 workers.

False promises were made to expand the program throughout The Republic however, the ‘right to work’ was withdrawn which led to what is known as ‘The June Day Uprisings’, warfare amongst the national guard and the workers which left thousands of protestors dead.

The ‘right to work’ movement reached the political discourse in Britain in 1889 and became a goal of the Independent Labour Party. Ken Hardie an ILP member in parliament breathed life into the unemployment debate. His maiden speech to parliament called for a policy on employing the unemployed.

“…we ought to have some permanent machinery to deal with the unemployed, the conditions of which should be twofold. In the first place it should be elastic. Labour should be organised in what he might call skeletal battalions, which might be filled in times of distress to their full strength, and which might go down again to skeletons when employment was plentiful. In the second place, the employment should be of a temporary character, and not such as to induce the recipients of it to remain in it in preference to seeking employment elsewhere”

The right to work and having the government act as an ‘employer of last resort’ gained traction across the political spectrum over this period. The choice for policy makers was, admit they had the capacity to employ the unemployed during downturns and they could set up works to to do or they could leave the unemployed to face destitution and misery, risk electoral defeat or a social revolution. The conservatives came with a counter offer found in the works of a conservative member of the House of Lords, William Beveridge in Unemployment: A Problem of Industry.

Beveridge argued in 1909 though unemployment was a result of the capitalist system it was only necessary to eliminate frictional unemployment and provide relief for the unemployed through unemployment insurance. The conservative alternative to Labour’s ‘Right to Work’ was a system of labour exchanges between the public and private sectors and and a contributory unemployment insurance scheme. By 1911, this was the system in place in Britain.

In 1919 E.G Theodore, Queensland Premier with the Australian Labour Party attempted to pass the Unemployed Workers Bill. The goal was to place the full resources of the State and Local Government in the hands of a council dedicated to the elimination of unemployment. The State Government would undertake major works to increase the number of jobs, there were powers that would order private employers that could assist to augment their projects, while local authorities would delay or expedite programs to deal with the seasonal variations in the number of jobs available. The councils role would be to undertake research and commission vocational training. Welfare payments were to be transitional while employment was being organised.

Naturally there were objections from the capitalist class towards this goal. Headlines described this system as a ‘loafers paradise’ by The Courier Mail

“The so-called “Unemployed Workers” Bill and its extraordinary provisions were widely discussed in the city yesterday. Needless to say, the measure was very strongly condemned as a premium upon idleness…”

Mainstream media warned of communist atrocities and the perils of socialism. The bill never passed but we saw a shift in the language used by opponents of full employment. Whereas in Hardie’s 1908 bill we saw opposition to full employment, laying open the capitalist class opposition to a system of full employment by 1919 arguments were around how methods of achieving full employment were flawed.

Much of the ‘economic’ theories being used (Quantity Theory of Money;late 19th early 20th century, Loanable funds theory;circa. 1930s) were funded by industrialist and used as justification on why full employment was ‘unachievable’.

Throughout history there have been different ‘monetary systems’ in place. Today we operate under a ‘fiat’ system. (Literally Latin for by decree). A fiat monetary system is one where a sovereign power issues its own currency and floats it on an exchange rate for trade.

The monetary system in use during post WWII was a gold standard. Governments would specify a particular amount of gold specie in return for the currency that they issue. Thus currency was limited by the supply of gold.

During war periods the gold standard was often suspended. This allowed a government to spend without concern toward the gold supply. During the Napoleonic wars Britain entered a period know as ‘The Restriction’ which suspended the gold standard and they invested in building their navy and colonising half the world. Similarly the gold standard was suspended over WWI and WWII.

During times of war, it is ‘normal’ to have all real resources, including labour in use. There is often a shortage of raw materials and labour power. Hitler used a fiat system to build Germany’s military. Japan avoided a Great Depression because the Japanese Prime Minister, Takahashi Korekiyo, took Japan off the Gold standard in 1931, and introduced a major fiscal stimulus with central bank credit. (Jargon for issuing money without issuing a bond)

The Great Depression was largely a result of insufficient spending, being tied to a gold standard and opposition to full employment by the capitalist class. Full employment policies have enormous political consequences as the threat of unemployment is taken away. It ensures workers have higher bargaining power, politically we have more power to ensure greater provisions of public service, which erodes capitals claims on national income.

The period of WWII in Australia saw full employment in Australia. As I mentioned in this post. Australia experienced a period of a full employment policy were unemployment seldom rose above two per cent. The work of J.M Keynes and his General Theory influenced most western policy towards achieving this goal. Full employment was defined as more jobs advertised than demanded (Beveridge curve) and Keynes ‘pump priming’ was used to ensure aggregate demand (total spending) was sufficient with this goal. Keynes very clearly articulated unemployment was a result of insufficient aggregate demand. (Spending in total)

Pump priming is a mechanism where you stimulate the economy enough to increase the marginal propensity to consume and the additional spending reaches enough to generate full employment.


The right to work was once a goal of workers movements in France, Britain with the Independent Labour Party, and an early goal of the Australian Labour Party. It sat alongside universal suffrage and the eight hour day.

Systems of unemployment insurance were compromises over policy goals of guaranteed employment. Today the workhouses of the 18th century are back in a modern form (WftD, CDEP), the pernicious nature of making unemployment so unattractive so the unemployed take any available job, no matter how atrocious the conditions.

Full employment policies were introduced post WWII though didn’t use a system of guaranteed jobs and provided unemployment insurance while workers waited for work to be created. However, there was a clearly defined goal of ensuring more jobs than work demanded. Today definitions of full employment are pathetically defined.

The next post will look at how a fiat currency can always be used to employ all available labour using a Job Guarantee as a buffer stock mechanism and changing the definition of productive work!

Full Employment Demise

I’ve recently been reading a number of different sources on unemployment, its causes and its use as tool of social domination.

Article 23 on the UN declaration of Human rights

(1) Everyone has the right to work to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

Throughout history there has always been opposition to full employment policies. During the post WWII era Australia defined a full employment as;

a society as one in which there are more jobs on offer than people seeking them, so that work providing a secure dignified existence may be easily obtained by all. (Beveridge, 1944, Full Employment in a Free Society)

Our current system of more people chasing fewer jobs than demanded and the pernicious work for the dole (WftD) and community development employment program (CDEP) uses unemployment as a fear to ‘force’ individuals to accept terrible working conditions and lower wages. Our current system punishes people without work because we have made a policy choice to ensure a shortage of jobs.

Our employment system wasn’t always like this. During WWII and the post WWII period unemployment seldom rose above 2%. This policy was guided by the 1945 tax white paper on Full Employment, under a public servant by the name of H.C Coombs. It was a fundamental aim of The Australian Government to ensure enough jobs for all up until its abandonment in the mid nineteen-seventies.

This policy for full employment will maintain such a pressure of demand on resources that for the economy as a whole there will be a tendency towards a shortage of men instead of a shortage of jobs. This does not, of course, mean that at any particular time everybody will be at work: some people will be away from work because of sickness, some will be taking a spell between seasonal or periodical employment, some will be in the process of changing from one employment to another offering better prospects, some will take time to acquire new training to equip them for other employment. These reasons for unavoidable absences from work can gradually be made less important. but in any case there is no need for them to entail poverty, insecurity and the feeling of being unwanted for the individuals concerned. (1945 Tax White Paper on Full Employment)

Our current system justifies high rates of unemployment and underemployment under a concept called the non accelerating inflation rate of unemployment (NAIRU) that determines there is some natural market determined rate of unemployment that if we were to fall below would trigger inflationary pressures.

During the 1970’s the prevailing school of thought became that we needed a pool of unemployed to discipline the rate of inflation. It ignores that for a quarter of a century Australia managed to eliminate involuntary unemployment, matching the labour market to the hours desired. It was an enormously successful policy that kept in place because the public understood that the Government of the day chose the unemployment rate. They witnessed it during WWII when every available resource in the country, including labour, was devoted to the war effort and there was consensus that we could maintain this after the war.

Unemployment is far more costly than inflation. There are physical and psychological costs to unemployment. It is a cause of a loss of skill, the longer you are employed the longer you are unable to participate meaningfully in society. There can be, a sense of isolation, family and relationship breakdowns, a loss of security, homelessness, and our communities are poorer because of it.

The oil shocks of the 1970s caused supply side inflationary shocks throughout most of the world. We had what is termed ‘stagflation’ high unemployment and high inflation and the prevailing school of thought that was emerging was from Milton Friedman. On a tour through Australia The Age newspaper on 11 November 1975 reported “…The inflation rate was caused primarily by an excessive broth in real wages, which led the professor to opine that our long cherished arbitration system ‘seems to be highly unfortunate’ in the way it sets wages…” Despite oil rising over 400% Friedman’s lectures focused only on demand-side pressures.

The primary objective of this era became fight inflation first. In the dying days of the Whitlam Government, The treasurer, Bill Hayden, reversed commitment to Full Employment and caved into the consensus of Treasury who wished to have unemployment remain high until the underlying rate of inflation fell. Whitlam’s embarkment of Swedish style ‘active labour market policies’, principal job creation scheme (Regional Employment Development) and public sector job creation was cut from the 1976/77 budget.

From the Fraser government onwards the political discourse turned to excessive wage growth causing unemployment. It was a message targeted towards unions and an excuse to deunionise the workforce. Attacks on real wages began, the language turned from a full employment economy being able to provide welfare assistance to welfare assistance induced people to be unemployed and used a justification for cutting welfare.

There has always been an understanding amongst the capital class that unemployment is necessary to further their interests. Cabinet meetings from 1951 in the Menzies Cabinet;

McEwan: Inflation results from two things: too much money and too little work. The circumstances of full employment are the greatest single cause of inflation.
Menzies: If we can reduce public spending and private investment we will be attacking that problem.
McEwan: It is a terrible thing to think that the fear of unemployment is the only way that men can be made to work harde

During the proceeding decade both major parties had ‘stop inflation first’ policies by using the unemployed. The Hawke years saw the Prices and Income Accord which saw real wages fall by 7 percent over 5 years. Coombs called this a ‘return to scarcity’ The average duration of unemployment grew from 3 weeks in 1966 to 9 weeks in 1973, 28 weeks in 1978, 47 weeks in 1984 and 49.7 weeks by May 1988.

This increase in the period people were unemployed saw public sector reforms to drive productivity. This included huge changes to the Commonwealth Employment Service such as including activity tests where incomes could be stopped or reduced for non-compliance. It arks back to the philosophy that the fear of unemployment marks people work harder. This was the fundamental idea around theses changes. Public sector job creation was cut and there was emphasis on private sector job creation. By 1991 the Keating Government was saying ‘this is the recession we have to have’ Keating saw unemployment as international, necessary and inevitable. ‘It is the unemployment we had to have’. There was one incidence where he was so animated in discussing the need for the unemployed he was made to promise that he would never perform like that in public.

By 1998, under the Howard Liberal Government the CES was shut and it was outsourced to the Job Network. Despite criticising the policy for twelve years, when the ALP won office in 2007 they maintained it. The Prime Ministers wife had made millions as a Job Network service contractor.


This is a very brief overview of the demise of what was once a bi-partisan policy that worked to ensure jobs for all. Today the policy for unemployment has to be masked behind false sentiment that the government is doing all it can to create jobs. The reality is as a monopolist of The Australian dollar, the Government can purchase whatever is for sale in Australian dollars, including idle labour.

Later I’ll look at Right to work movements in France, Britain and Australia and solutions to ending unemployment and underemployment through public sector job creation and a Job Guarantee (JG). The JG is an alternate to the NAIRU approach mentioned above and rather than using a buffer stock of unemployed, it uses a buffer stock of employed. The idea is then to transition people from the buffer stock of employed people into a public or private sector job.