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The Role of the Central Bank

Whilst the war loans programs absorbed excess spending power from individual Australians, the government also sought to absorb ‘surplus investible funds’ held by the trading banks in order to restrain their capacity to fuel private spending.

To reduce the trading banks’ lending capacity, the government required them to lodge these ‘surplus investable funds’ in ‘special accounts’ held by the Bank. The funds lodged in these accounts were then invested in public loans to support the war effort. By holding these funds, the Bank gained a great deal of control over the banking system as a whole. During the war, the Bank was empowered to do this by special National Security Regulations. These powers furthered the Bank’s evolution into Australia’s central bank. Other powers conferred through the National Security Regulations included exchange controls, the authority to determine advance policy and interest rates and a number of other significant controls over the banking system.

The Bank’s head office building in Martin Place, Sydney. Image: Reserve Bank of Australia, PN-000967.

The Bank’s head office building in Martin Place, Sydney. Image: State Library of New South Wales, FL1446364.

These powers were conferred due the exigencies of war, and the National Security Regulations would lapse with the cessation of hostilities. However, the effectiveness of these measures during the war convinced many that they should be maintained in peacetime. The Curtin Government entrenched controls over monetary policy, banking policy and exchange rates by enacting the Commonwealth Bank Act 1945. Commonwealth Bank Governor Hugh Armitage consulted closely with Treasurer Ben Chifley on the form the legislation should take, in order to formalise the Commonwealth Bank’s role as Australia’s central bank. This legislation was the genesis of the Reserve Bank’s present charter to contribute to:

  • the stability of the currency of Australia
  • the maintenance of full employment in Australia
  • the economic prosperity and welfare of the people of Australia

In introducing the legislation, Treasurer Ben Chifley stated his view that

the necessity for the changes in banking legislation has been demonstrated by the report of the Banking Commission, confirmed by the experience of war, and established beyond question by the requirements of the future”

Where previously it had exerted influence, legislation gave the bank codified legal authority. Many of these central banking powers had been proposed as early as 1937, by the Royal Commission on Monetary and Banking Systems, of which Treasurer Ben Chifley had been a member. According to economist John Edwards, Curtin used the war powers available to the federal government to impose “Commonwealth Government control over the central bank, and central bank control on the private banks”. Indeed, the marshalling of Australia’s financial resources in support of the war effort depended on the Commonwealth Bank’s coordination with the private banks.

Image Transcript: Special accounts. Regulation 9 of the Wartime Banking Control Regulations requires every trading bank to lodge in a Special Account with the Commonwealth Bank such part of its surplus investible funds as is directed by the Commonwealth Bank in accordance with a plan approved by the Treasurer. 'Suplus investible funds' is defined to mean the amount by which each bank's total assets in Australia at any time exceed its assets in August, 1939. Regulation 10 provides that a trading bank shall not withdraw any sum from its Special Account without the consent of the Commonwealth Bank.

This excerpt from Commonwealth Bank Governor Hugh Armitage’s comments on the proposed Commonwealth Bank Act 1945 demonstrates his belief that in order to maintain its wartime powers in order to control inflation in the post-war period. Image: Reserve Bank of Australia, D14/24032

Image Transcript: It is imperative that the Central Bank should continue to keep control of the large amount of purchasing power which has been artificially created under war conditions as otherwise inflation is inevitable

This excerpt from Commonwealth Bank Governor Hugh Armitage’s comments on the proposed Commonwealth Bank Act 1945 demonstrates his belief that it was necessary for the Bank to retain its wartime powers in the post-war period in order to control inflation. Image: Reserve Bank of Australia Archives, D14/24533

This legislation fundamentally transformed the role and functioning of the Commonwealth Bank as Australia’s central bank. The bank’s roles and functions continued to evolve over subsequent decades. The bank’s central banking function and its commercial activities were separated entirely in 1960, with the creation of an independent Reserve Bank of Australia. Over subsequent decades, it increasingly adopted market-orientated instruments of monetary policy rather than direct controls. However, the origins of much of the Reserve Bank of Australia’s present character can be traced to the demands placed upon it by the wartime economy.