Chapter 27 - Public Bank Example in Australia 1911

Commonwealth Bank 1911 as a ‘Peoples Bank’
King O’Malley made Australia prosperous with minimal debt.

King O’Malley knew the tricks of banking. As a young man, he had worked in his uncle’s bank in America. Banking fascinated him throughout his life. He had been active in the campaign of U.S. President James Garfield. He brought his knowledge and ideas about nation building to Australia. He wished to set up a public bank in Australia to assist in the development of the nation. Besides ensuring that adequate credit was available to business, including farmers, the bank was designed to fund public infrastructure projects. King O’Malley was instrumental in setting up the Commonwealth Bank that funded many public projects, including the Trans Australia Railway and a Steamship Company to ship Australian product. This railway project was a particularly large undertaking. The bank effectively created the money at no cost and passed it to the numerous contractors and employees that built this extensive rail line. A rail line adds to the efficiency of a nation whilst putting money in the hands of the people who continue its circulation by spending. Australia became the most prosperous nation on earth. The Australian people were prosperous and the nation was prosperous in a manner that latter caused Australia to be called the “Lucky Country”.

China has setup a Public Banking system similar to The Commonwealth Bank of 1911. China has experienced a similar rise in prosperity.

The Commonwealth Bank was also financing the farming industry in an era that was sometimes described as a golden age. Some would say that we were “Riding on the sheep’s back”. The Commonwealth Bank very successful financed the first World War. This national public bank financed a wide range of businesses, industry, farmers, and home owners, primary producers creating a very dynamic economy. The Commonwealth Bank worked well with the private banking industry. The profits of the bank remained with the government to assist the nation further. What is interesting with a public bank is that the interest obligation of the government is owed to a bank that is owned by the government. Thus the debt it owed by the government to the government. The debt is somewhat irrelevant. The government did not have crushing debt obligations to private institutions that required extensive tax obligations from the people. Work was plentiful. Taxation was not harming the economy. The nation gained from the output from the vibrant businesses and the national infrastructure projects.

The City of London financiers heard of this deplorable bank and sent a representative to quash the bank. Before long, the government was flipped and the new incumbency soon throttled the activities and, around 1924, handed the management of the bank to wealthy individuals with a strong affiliation to the private banking industry. The active involvement of the Commonwealth Bank in the economy was wound back. The culling of the provision of credit caused the economic activity in the nation to recede. Eventually, severe economic conditions were created inappropriately called ‘The Great Depression’. There was nothing great about it and it was predictable or even maliciously created. As is usual when provision of credit is culled, the money supply falls, which always affects the Circulating Money more seriously. With a lack of circulating medium and the unavailability of credit, businesses and farms suffered and the people went hungry.

Within a few years, someone decided to start another war, and the Commonwealth Bank was allowed to crank up its credit provision to finance the nation’s warmongering during World War Two. It is one of the reasons Australia did so well in World War Two. Australia used a government owned bank and financed itself. Other nations borrowed heavily from private interests. At the end of the Second World War, the activities of the Commonwealth Bank were wound back.

King O’Malley: Federal Parliament 1909

“The private banking system of the Commonwealth is only a legalized monopoly for the gathering of wealth from the many, and its concentration in the hands of the privileged few... We are legislating for the countless multitudes of future generations. We are in favor of protecting, not only the manufacturer, but also the man who works for him. We wish to protect the oppressed and downtrodden of the earth.” [1]

King O’Malley: Melbourne Town Hall 1943

“Previous to taking office in the Fisher Government, I had long seen the weakness of the existing financial system, wherein money and the issue of credit were in the hands of private interests, manipulated for their own profit and not for the welfare of the community. I saw that the Parliament of the Commonwealth, although backed, by the great natural resources of this immense and rich continent, was not free to use the credit of the nation for the establishment and development of national under-takings. It was obliged to go as a mendicant to private banking institutions to obtain finance at a high rate of interest, so necessary to the well-being and progress of the community.

Conscious of this frustration of the people’s sovereign rights, because credit issued for public purposes became available. Only as a debt to private banking institutions, we set about the task of establishing a people’s bank.

Our proposals met with studied opposition and hostility from all the forces of private financial interests, and of those in possession of privilege and power; but by dint of strenuous campaigning, the loyalty of my supporters, and ceaseless battles over a period of ten years and five months, our labours were eventually crowned with success. As a result the institution now known as the Commonwealth Bank of Australia, the first of its kind in the world, came into being in the year 1911.

As originally constituted under the Governorship of Sir Denison Miller, the Commonwealth Bank rendered a very important service to the public in financing the last war for 350 millions, saving the people ten millions in interest. It averted a depression in the years 1920-22 which operated disastrously in other countries of the world. Six months after the Bank opened its doors to the public, it returned in full the original capital of twenty thousand on which it started, and which it should be noted, was advanced by the Commonwealth Treasury.

On the death of Sir Denison Miller, in 1924 under the Bruce-Page Government, the Commonwealth Bank became a bankers’ bank instead of a people’s bank, thereby strengthening the position of private trading banks.

Casting my eyes into the future, I envisage a free and prosperous people emancipated from the evils associated with vested interests centered in financial control of trade and industry. With financial policy under public control I see the desires of the people expressed in finer public institutions, better houses, homes instead of mere shelters, improved educational facilities, school buildings, sound health and nutrition, and opportunities for recreation and higher culture brought within the reach of all without the crushing burden of debt and taxation.

If the great ideals for which the New World Reconstruction Movement stands are to be in the world of to-morrow, then the Commonwealth Bank must be converted into a people’s bank so that it shall be the sole trustee of national credit which it can provide debt-free and interest-free to win the war and win the peace. I, therefore, call upon every citizen in this vast audience and throughout the Commonwealth to rally to the support of the New World Reconstruction Movement to achieve these great objectives.” [2]

The Commonwealth Bank of Australia was a government-owned National bank. Between 1912-1923, it played an essential role in the development of the nation. Between 1914 and 1924, the Commonwealth Government created whatever finance it needed, debt-free and without incurring the large interest charges to private banks. This saved the government immense sums in interest. The bank financed numerous large infrastructure projects and gave impressive support to farm industries and created the necessary infrastructure for a thriving farm export industry that continues to the current time. The elimination of the bank has allowed the current mistreatment of farms by private banks creating a trend to foreclosure and suicide. The Commonwealth Bank was a great success even though it did not possess the power to create the currency of the nation and also operated without significant start-up capital.

D. J. Amos 1943

“Under the regime of the private banks, the flotation expenses of a loan in London, which Australian Governments would have had to pay, were 6%: but the Commonwealth Bank floated $700 million of loans for a charge of 0.56%, thus saving Australians some $12 million in bank charges. Even then the Bank made a profit of 0.2%.” [6]

“By utilising Australian notes in this manner the Commonwealth Government avoided debt, interest-charges and taxation, and, before it finally entrusted the Australian Notes Account to the Commonwealth Bank, it made enough money out of that account to pay the greater portion of the construction cost of the East-West Railway, the remainder coining out of revenue.” [7] [3]

“It saved the Australian primary producer from stark ruin by financing, with (and sometimes without) the assistance of the private banks, pools of wheat, wool, meat, butter, cheese, rabbits, and sugar, to the total amount of £436,000 000; it found £2 000 000 for the purchase of the Commonwealth Fleet of Steamers, which again saved the primary producer from ruin through lack of transportation facilities to his market overseas; and it enabled Australia to transfer abroad, with the maximum of efficiency and the minimum of expense, £3 560,951 for the payment of her soldiers. [3] [5]

In 1921, Sir Denison Miller was reported in the Australian press as saying “The whole of the resources of Australia are at the back of this bank, and so strong is this Commonwealth Bank that whatever the Australian people can intelligently conceive in their minds and loyally support, that can be done.” [3] [8]

The Commonwealth Bank’s first Governor, Denison Miller said that the Bank did not need capital because “it is backed by the entire wealth and credit of the whole of Australia.”

D. J. Amos 1943

“When, during an interview in 1921, Sir Denison Miller was asked if he, through the Commonwealth Bank, had financed Australia during the war for £350 000 000, he replied: “Such was the case; and I could have financed the country for a further like sum had the war continued.” Again, asked if that amount was available for productive purposes in times of peace, he answered in the affirmative.” [3] [4]

Amos continues with a very serious accusation:

“As a matter of fact, he had just given a striking example of the power of the Bank in times of peace. In the latter half of 1920, the banks in other parts of the world started their policy of deflation, in order to raise the value of currency to such high levels that they, who possessed the monopoly of it, could secure the real wealth of the nations for themselves, ...” - “The private banks in Australia commenced to follow the example set by the banks abroad, but Sir Denison Miller brought the Commonwealth Bank with a rush to the rescue of the threatened people. Partly by purchasing Commonwealth and other Government securities, and partly by increasing his advances, he released, between June and December, 1920, £23 000 000 of additional currency, as a slight hint as to what he would do if necessary, and deflation in Australia was deferred.” [9] [3]

This last paragraph exposes a serious matter. Amos describes a world-wide private bank initiated depression for the purpose of depressing prices compared to money for the purpose of acquiring the assets of nations and citizens:

In the latter half of 1920, the banks in other parts of the world started their policy of deflation, in order to raise the value of currency to such high levels that they, who possessed the monopoly of it, could secure the real wealth of the nations for themselves,...

Amos then suggests that Australian banks joined this action against the people. He tells us that Sir Denison Miller was the hero of the people by thwarting their devious action by cranking up his Commonwealth Bank to shore up the government and provide credit whilst the private banks purposely cut their lending.

Unfortunately, Denison Miller died in 1924 and various banking adjustments gave the private banks the upper hand and they got their depression creation opportunity with consequent asset confiscation.

In the Melbourne Sun of the 13th October 1924, the following paragraph appeared:

“The Bruce-Page Government in its selection of the Commonwealth Bank Board has just taken the bold step of converting the Commonwealth Bank into a bankers’ bank, or a bank for bankers.” [Hansard 1947][10]

Denison was certainly a smart man as his procedure in releasing extra credit is essentially what others are now promoting as ‘Countercyclical Finance’. ‘Countercyclical Finance’ is a clever arrangement where the government sets up a public bank which continues to lend when the private banks cease to do so. Denison Miller will be written into the history of banking in a thousand years time.

The history of Australia’s public bank, the Commonwealth Bank, gives a lesson for the world. It made Australia the most prosperous nation in the world. Australia was ripe for development with plenty of opportunities for enterprise, but it lacked infrastructure and development finance.

The destruction of Australia’s prosperity continued. I now give you extracts of the heated debate in 1947 as recorded in Hansard. In 1947, Mr Duthie, honorable member for Wilmot and Methodist minister had this to say in the Australian Parliament. The date 1694 is the date that a private group of businessmen created the inappropriately named “Bank of England”:

Mr Duthie (Wilmot)

“The public control of the nation’s credit, envisaged in this bill, has become a necessity for financial and economic survival because of the failure of the private financial system in the past. ...” [10]

“...and I venture to prophesy that before 25 years have passed nearly every nation will have advanced far enough to see that control of finance and credit can no longer remain a private monopoly, but must, for financial and economic sanity, become a people’s monopoly. Ever since 1694, private banking institutions have issued the credit of the nations and dictated to governments, withholding or releasing credit at will, thus holding in their hands the destinies of the people. For 353 years, these institutions have had world ramifications, surrounded themselves with a holy of holies atmosphere, discouraged a study of money and finance among the common people, put out such false stories as ‘safe as a bank’ and ‘banks lend only their depositors’ money’,...” [10]

“Ever since 1694, the private banks have created credit on which they have charged interest to individuals and governments.” [10]

“Money, the medium of exchange of goods and services, the life-blood of distribution between producer and consumer, is of two kinds: (1) Cash, coins, notes, &c. ; (2) credit or cheque money. As about 90 per cent, of the world’s industry and trade is now carried on with credit, it can be seen what a profitable industry the private banks have carried on for 353 years - creating credit by book entries in a ledger and charging the borrower up to 10 per cent., and even 12 per cent., interest. Credit manufacture became more profitable when it was discovered that a bank could lend safely even up to ten times the amount of its deposits. Money has been made a weapon for good or evil, boom or slump, in the hands of private banking institutions - a master of the people and governments instead of a servant.” [10]

“This bill aims to remove the control of this all-powerful means of exchange, this privilege of creating credit, from the hands of men who are not responsible to or elected by the people to a public authority elected by and responsible to the people. The private banking system, churning out enormous profits for a few people, has plunged the world into disaster time and time again. “Safe as a bank” has been a terrible misnomer. By periodic restriction of credit, calling in overdrafts, reckless lending in good times and panic withdrawals of credit in bad times, the banks have laid trails of ruin.” [10]

“In 1825, a parliamentary commission in England proved that, in the panic of 1793, over 100 English banks failed and that, from 1810 to 1817, 600 banks failed. In the panic of 1825, up to the time of the inquiry, 26 banks collapsed. In the great, panic of 1837-38 in America, more than 3,000 banks, practically every one in the country, closed their doors. In the stampede of 1856, every bank in America put up its shutters and then, in 1893, in Australia, the banking system failed so disastrously that people lost their savings, citizens tramped the roads semi-starved, trade and commerce were at a standstill - all because, as King O’Malley said, “there was an absence of a good banking system and the cry of over-production when the tragedy was under-consumption”. In the past 150 years, the private banks, operating internationally, have failed the people on the following tragic occasions: - 1793, 1810-17, 1825, 1837, 1847, 1857, 1866, 1878, 1893, 1920-21, 1930-35. There would have been another depression by 1941 had not war intervened, for unemployment in 1937 was about 7 per cent., in 1938 about 8 per cent., in 1939 about [transcription error]?0 per cent., and in 1940 over 10 per cent., the actual figure being over 240,000 out of work, with 87 per cent, of those working averaging only £187 a year income.” [10]

“...and to-day, in 1947, the bill before the House represents the final stage in this long evolutionary process, which all nations will eventually reach - that is, a bill to prohibit the private manufacture of credit, our most important and most powerful method of exchange, and to place that responsibility under public control through the people’s elected government. Henceforth; the private manufacturer of bank credit will be a counterfeiter.” [10]

“...the Commonwealth Bank financed World War I. by providing £350,000,000, saved primary producers millions of pounds in interest charges, and cushioned the depression of 1920-21 by nearly £20,000,000 before it was strangled as a competitor of the private banks by the Bruce-Page Government in 1924, when, according to the Sydney Sun, “it became a bank for bankers”, with a bank board under private bank domination and control.” [10]

“Consequently when the great depression hit us in 1930, the Commonwealth Bank was impotent to cushion the effects of the financial hold-up. The real rulers of Australia were, not the Scullin Government, but the financiers outside Parliament, who were subject to no one but their shareholders, who demanded that, where the people’s welfare and their profits clashed, the profits must come first. The then Prime Minister, Mr. Scullin, needed £19,000,000 from the Commonwealth Bank Board to alleviate unemployment and to give the wheat farmers over 4s. a bushel, but the board said, “No”. As in Britain, so in Australia the financial interests seemed determined to throw out the Labour government, by cutting off its lifeblood - credit. To-day in Victoria we see the same process in operation - a Legislative Council elected by 30 per cent, of the people and an instrument in the hands of outside banking interests refusing supply, or credit, and forcing a Labour government, with a record of two years of splendid administration, to go to the country. No greater example of immorality in politics, no worse illustration of political pickpocketing, has ever been known than that in recent weeks of the Liberal-Country party plot, backed by financial interests in Victoria.” [10]

“To-day, the banks and the Opposition are trying desperately to whitewash the part played by private banks during the period of the depression - 1930-35 - but facts and personal experiences cannot be by-passed. People’s memories, though dulled a little by the present conditions of prosperity, will recall bitter experiences. In the years 1924-29, the banks advanced money recklessly, always trying to make hay while the going was good. Then, on the 29th October, 1929, came the financial crash on Wall-street, because some one had panicked and started to sell out. Farmers and business men, working on credit or mortgage, suddenly had a blackout as overdrafts were called up, demands for the payment of debts rolled in, mortgages were foreclosed, and credit was contracted. The vital life-blood, money or purchasing power, dried up. Industry could not sell its production. Primary producers saw prices go into a tailspin, and men were thrown out of work. This meant less money with which to buy the production of factories and farms. Pensions were also slashed, thus further reducing purchasing power.” [10]

“It was as if the jugular vein had been severed, for as blood is to our body for physical health, so is finance or purchasing power to our nation and our people for economic health.” [10]

“The banks do not like being reminded of their financial dictatorship, but we will not let them forget it. In the United States of America during 1931, no fewer than 2,000 banks had to close their doors. In this so-called mighty citadel of free enterprise, 28,000 business firms went bankrupt, 39 per cent, of the largest corporations lost money, and half the major railroads were subject to receivership. By January, 1931, wheat was selling at the lowest price in 250 years, and textiles were down 32 per cent.” [10]

“The tidal wave of poverty and misery rolled over Europe and, indeed, most of the world. Germany soon had 6,000,000 unemployed, as American financiers withdrew credits and called in overdrafts from German industry financed under the Dawes Plan of 1924. Fifteen nations went off the gold standard, and Hitlerism was born in the resultant despair, misery and poverty. By the end of 1931, the United States of America was importing less than one-third as much as in 1928. That meant unemployment in the tin mines of Malaya, the silk mills of Japan, the rubber groves of Java, the coffee plantations in Brazil, English woollen mills, German dye works, Czechoslovakian glove factories, Italian felt looms and Australian shearing sheds. By the end of 1932, over 14,000,000 persons were out of work in Europe. These facts can be verified in Lewis Brown’s book, “Something Went Wrong”, which was written in 1942. I give this rapid survey of world conditions at that time, because there are still some who refuse to believe that the depression did so much damage. With the “lid off” in America in 1947, with the sky the limit, and with reckless lending, another depression is inevitable in that country within two years, and, then, Heaven help -the nation that has not control of its own finances and internal economy. For 200 years, uncoordinated, unplanned privately financed economies have been characterized by booms and slumps. It will happen again in such countries.” [10]

“In Australia in the depression, 750,000 persons were out of work. Debt-ridden farmers found that interest charges on overdrafts which had been advanced in the boom years “ate up” 200 bushels of wheat compared with 100 bushels before the depression. _ The word “mortgage” recovered its original meaning - “death-grip”. Food was piled high in warehouses and silos, but 2,000,000 people throughout the world died from starvation in 1930-35. Wheat was dumped in the sea; oranges were piled high in California and allowed to rot; potatoes were dumped in the rivers, and armed guards were stationed to keep people from recovering, them so that they could eat them. Approximately 1,500,000 oranges were thrown into the Bay of Biscay, 5000 head of cattle and pigs were slaughtered weekly in Denmark in 1933 and coffee was burnt and cotton ploughed under in other countries. All that occurred because financial interests bullied governments and withdrew credits.” [10]

“I lived and worked on a wheat-farm in the Wimmera district during 1932 and 1933. A close relative of mine who farmed there in the period between 1910-40 paid £5,000 in interest to bankers and others on a farm originally costing £3,800. By 1932, he was paying nearly £200 interest a year. The position grew worse, and the local manager became a little Hitler, a tyrant who bullied the farmers into abject servility. “Our interest”, he thundered, “or we take over your machinery”. He did. Next year, the bank got a lien on the crop, and then on the horses and sheep. It even tried to collect the few shillings a week which the farmer’s wife was getting from the product of a few cows. If he wanted fertilizers, bags, oil, grease, or new machinery parts, he had to go cap in hand and beg the bank to let him have them. This is called “free enterprise”! This is called “freedom.” [10]

“They cannot do anything of the sort. Nothing that they can do will release the death-grip of the private banks. Until the overdrafts are paid, they are the vassals of the bank.” [10]

“Farmers were selling out at the rate of 28 a month in the Mallee and Wimmera districts as this great financial dictatorship got control. Farmers who suffered and lost are betraying their own conscience if they will not realize that under government control of credit primary production will always be safeguarded from a repetition of those terrible years. The effects of the private banks preference for profits before the people’s welfare is revealed by the fact that in 1936 there were 2,750 deserted farms in Western Australia and 2,000 in Victoria, whilst from 1,500 to 1,700 farmers went through the South Australian bankruptcy court in a few years. While business men, workers and farmers, and especially their wives and families, were going through that Gethsemane, the private banks in Australia increased their assets by £35,000,000. The Commonwealth Year-Book reveals that between 1930 and 1935 about 195,793 insurance policies were forfeited and 1,113,156 industrial policies surrendered - a rake-off of £128,000,000 for the insurance companies! Not the elected government of the day, but the non-elected bankers, dictated the terms and conditions of life; what we should wear, and eat and buy. Yet the Opposition has the effrontery to allege that this new measure will put us in bondage, crush our liberty, and result in our farms being taken over by the Commonwealth Bank. On the contrary, however, the aim of the Commonwealth Bank will be to keep finance circulating among producers and consumers. What a contrast to the semi-monopoly of private banks, which reduced their own numbers from 56 to 9 in 70 years. Their policy which is based on private gain rather than on a consideration of the public welfare, restricts credit just when it is needed and ‘sells you up’.” [10]

“...the private banking system has put production in a monetary strait-jacket.” [10]

Mr Mulcahy:

“The private banking system of Australia could have saved thousands of lives during the depression had it wanted to do so. We know that during that period thousands of children were suffering from malnutrition. Many of them were homeless and went without food and clothing while there was plenty in the land. During that period the private banking system of this country failed completely, whereas it might have saved Australia.” [10]

Mr Riordan:

“The failure of the private banks in 1893 seriously retarded the progress of Australia for many years. It was an economic and financial setback of great magnitude and its effects were grievously felt for years after by this young country, which was just beginning to find its feet and develop. The private banks have a lot to answer for in having destroyed confidence at a critical stage of our development. The failure of the banking system at that time unquestionably arrested the steady progress of the country and we had painfully to rebuild from the wreckage for which the private banks were responsible. Thousands of depositors were ruined. They had no security whatever. ...” [10]

“In the late 1920s the “Big Four”, the representatives of the British bankers, came to Australia to tell us how to do tilings. They came primarily, of course, to ensure the protection of their investments in Australia. They were followed in July, 1930, by Sir Otto Niemeyer. ...” [10]

“He was a director of the privately owned Bank of England. He laid down a policy for Australia which the Commonwealth Year-Book referred to as a severe deflationary policy. Every man, woman and child in Australia felt the effect of that dictated policy. It has been suggested in this debate that the private trading banks were not responsible for the depression. The depression that began in 1929 was not. the result of action by ordinary men and women. It resulted from action taken by the world financiers, which had repercussions in Australia. ...” [10]

“To sum up, nationalization of banks should be supported for these reasons -

  1. It will end the dictatorial power of the private banking monopoly.
  2. It will enable the people of the country to be saved from the misery and degradation of another depression by permitting the expansion of credit to offset unemployment.
  3. The whole of the profits from the banking system will go back to the people.
  4. It will protect thousands of workers who are paying off the cost of their new homes. They will not lose them as other workers did in the depression of 1929.
  5. It will control the issues of credit on a national scale and will ease the terms of credits for farmers, business men, shopkeepers and home-builders.
  6. It will permit national development to proceed with such measures as water conservation and the elimination of soil erosion.
  7. It will save governments from the dictatorship of private banking monopolists, who have previously forced wage, pension and salary reductions upon the people.
  8. It will give security to depositors, because the full resources of the Commonwealth will be behind the banking system.
  9. It will increase bank services to farmers.
  10. It will give unrestricted security to bank employees.
  11. It will prevent the establishment of a private banking monopoly, which is threatening Australia, as evidenced by recent amalgamations of private trading banks.


Mr Edmonds: (Honorable member for Herbert)

“Of course, they deliberately refrained from mentioning that the present system of private banking supplies a striking example of political control. The boards of directors which control the trading banks consist now of politicians and their friends, and those politicians are, in the main, of a particularly vicious anti-labour and anti-working class type. ...” [10]

“Supporters of the Government have pointed out that in the first place the creation of the Commonwealth Bank aroused the most bitter opposition from certain people; but that later, when a tory government appointed a board of conservatives to control the Commonwealth Bank, the very people who had so bitterly opposed the creation of that bank chose to regard it as a bulwark against what they termed "socialist aggression” ...” [10]

“His bosses, the bankers, tell him that he must laugh at such expressions of opinion. ...” [10]

“The honorable member for Fremantle (Mr. Beazley) said that as a school teacher he had noticed in the physique of children, coming under his charge the effects of malnutrition caused by conditions which prevailed during the depression. Even to-day, many school teachers still tell of children who. during the depression, were obliged to go to school without their lunches because their parents had not the wherewithal to provide them. All that suffering was caused, because that was what financial monopolists desired to happen in this country.” [10]

Mr Holt: (Fawkner)

“We all agree that there should be a central control of credit policy.” [10]

Mr Chifley (Macquarie) (Prime Minister and Treasurer)

“No single factor can do more to influence the welfare and progress of a community than the management of the volume and flow of money. Mismanagement of money, on the other hand, has contributed to the greatest economic disasters of modern times - booms and slumps, mass unemployment, waste of resources, industrial unrest and social misery.”

“When the depression came the banks as a whole restricted new lending and called in advances.”

“In the absence of control, private banks can expand or contract the volume of their lending and so vary within wide limits the supply of money available to the public. They can also determine when and where they will lend and upon what terms ; and in these operations they are guided primarily by the interests of those who own and control them. - Whatever regard they may claim to pay to the wider concerns of the nation, their policies are dictated in the last resort by the desire to make profits and to secure the value of .their own assets. Experience of the past has been that private banks increased their lending in good times and contracted it in bad times, lent always where the profits seemed largest and most assured, and charged the highest rates they could obtain for their loans and general services.”

“Time and again the policies of the private banks have run counter to national needs for steady growth and high levels of employment. To go some years back it is correct to say that the banks fed the boom and promoted unsound development in the ‘twenties. When the depression came the banks as a whole restricted new lending and called in advances. Between December, 1929, and March, 1932, their advances fell by approximately £45,000,000. The effect of this was to accentuate the contraction of business and the unemployment of those years. They helped but little in recovery during the thirties, waiting rather for improvement to come from other sources instead of taking the initiative and helping to promote recovery. They followed these courses because it seemed best and safest from the stand-point of their own interests. ...”

“Moreover, the Commonwealth Bank Board, as constituted by the Bruce-Page Government, alined itself with the private banks during the crisis of the early thirties in attempting to force upon the Government a policy of monetary deflation and curtailment of wages and social service payments. That policy was stated in the following extract from a letter addressed by the chairman of the Commonwealth Bank Board, Sir Robert Gibson, to the then Treasurer, Mr. Theodore, on the 12th February, 1931, which read -

“Subject to adequate and equitable reductions in all wages, salaries, and allowances, pensions, social benefits of all kinds, interest and other factors which affect the cost of living, the Commonwealth Bank Board will actively co-operate with the trading banks and the governments of Australia in sustaining industry and restoring employment.”

“Thus during a critical time in Australia’s history the bank was used by reactionary interests for a purpose directly opposed to the welfare of the Australian people and in opposition to the will of the Government of the day. ...”

“In both wars the bank made advances against primary commodities to enable the producers to be paid promptly despite serious delays in sea-borne trade. These advances exceeded £350,000,000 during the six years of the last war.”

“In another field the bank has administered controls over banking, interest rates, the note issue, foreign exchange and gold and has developed the full functions of a central bank.”

“In all, the record of the Commonwealth Bank stands as a great justification of publicly-owned banking and demonstrates beyond question that a public banking institution is capable of being highly efficient, progressive and adaptable.” [10]

It must not be forgotten that this Commonwealth Bank was a visionary repair to the money system following the 1893 Australian Great Bank Crash. During this crash, many banks collapsed. Depositors lost millions. During a six-week period in 1983, thirteen of Australia’s twenty-two trading banks had suspended. The private banks had lent with abandon, which pushed up house and asset prices. They were breaking one of my rules for good governance, they were lending for existing assets rather than new assets. This creates speculative activity which escalates existing asset prices which then collapse when lending ceases. The prolific lending had lifted the lifted the volume of Bank Credit in society. As Bank Credit forms the greater part of the Money Supply, the Money Supply had significantly expanded. Bank Credit is always accompanied by debt. As the banks stopped lending and the prices collapsed, there were numerous defaults. This undermined the stability of lending institutions. When banks lend, they use your purchased asset as the backing for the loan that they have created. They have no backing whatsoever, except your asset. If they mishandle their lending, there is suddenly, no backing for the loan. The borrower suffers first and then the bank suffers, then the depositors suffer as well. Then the whole populace suffers. If it is not rescued, the whole nation suffers and the nation returns to third world status. There were government-owned and state-owned banks, but they were not of sufficient size to assist in this scenario.

When lending was cut back, economic activity became depressed. Asset prices collapsed causing the great Australian property crash of 1891 and the depression of the 1890s. Some suggest that the depression of the 1890s depression was deeper and longer than the so-called Great Depression of the 1930s. [5] The Australian banking crisis of the 1890s was among the most severe to occur in that century anywhere in the world.

Graph of Australia Bank Lending causing Depressions. Private banks are not capable of maintaining a stable Money Supply. Creative Commons Attribute - Andy Chalkley.

[The graph is a little unusual. Lending causes the Money Supply to change which changes the volume of money that is actually circulating. Large portions of the Money Supply are hoarded and do not add to the economic activity. The decrease in the Money Supply causes a fall in the GDP. The fall in GDP magnifies the visual effect shown in the graph. However, it is still a fascinating graph. I don’t subscribe to this type of graph.]

Plentiful lending by private banks into speculation caused an investment boom in Australia during the 1870s and 1880s. In 1887, a block in Melbourne nearly doubled in price in less than a year. Between 1880 and 1884, land prices in Sydney nearly doubled. The banks had created a speculative bubble in real estate, mining shares, and farm property which they promptly collapsed by cutting back on lending. When the banks reduced their lending in 1887, the fake asset values fell. Their cutback in credit whilst continuing to collect repayments severely contracted the Money Supply for the simple reason that the bulk of the Money Supply is Bank Credit. This bank-created contraction of the Money Supply, not only wiped out all of the speculative gains to date, but also threatened the stability of the money system and the viability of the banking enterprises that created the problem. This crash was a classic case of folly by private banks and their inability to maintain a steady Money Supply. Excessive lending by banks for speculation had created asset bubbles as well as creating an excessive expansion of the Money Supply. As their excessive lending slowed, the Money Supply contracted and economic activity plummeted. Asset values tumbled and the Money Supply shrank, bankers were left with customers that could not service loans.

This led to the great Australian property crash of 1891. Land prices fell to about half of their speculative peak. A depression had set in. In 1892, GDP fell by ten percent. In 1893, it fell again by about seven percent. Mortgage defaults increased dramatically as there was no money to pay back to the banks. Bank runs occurred causing the collapse of numerous financial institutions. Between 1891 and 1893, fifty-four banks shut their doors. Over thirty of them closed permanently and around twenty reinvented themselves. A clever move was used to reconstruct these ‘destroyed’ banks into ‘new’ banks. Creditors had to accept that their deposit be turned into future dated securities or preference shares. Thus the banks did not have to repay depositors the money the bank did not have until well in the future. This gave time for the bank to get its money creation activities back in action.

People lost millions. This was a spectacular bank-created banking crisis. The government itself continued much as before and was comparatively immune. These banks are inherently unstable, but like a fighter jet, they can still be flown if they don’t pull on the controls too hard. Lending for asset speculation is particularly hazardous to safe flying. The whole process of lending at interest is unstable as the debt rapidly exceeds the volume of money lent. Collectively, it is not possible for the banks to collect on their debts which means they are trading whilst insolvent. Many practices of current Investment Banks are inherently unstable. Protection is needed with a reinstatement of Glass-Steagall so that individual bank collapse is not contagious. The private banking industry continually cycles from crisis to crisis. The next crisis occurred a few years after the 1924 neutering of the Commonwealth Bank when control of the Money Supply was in the hands of the private banking industry.

The 1890s depression and the bank crashes which followed shortly after, damaged the trust in the private banking system. This discontent with banking behaviour led to the formation of the New South Wales Labor party in 1891. In the NSW elections later that year, thirty-five Labor members won election to the NSW parliament. The NSW Labor party and its worker based supporters wanted a public bank to protect them from the damage they had just experienced. The damage was largely due to the private bank’s inability to maintain a steady Money Supply. These private banks would lend profusely for a while and then stop issuing bank credit. This lend and stop caused violent fluctuations of the Money Supply. In 1893, the ALP conference created a policy that, amongst other issues contained the statement “Establishment of a National Bank - to secure State control of currency and transact all ordinary business.” This policy remained for more than sixty years. Sadly, the Labor party lost the plot and succumbed to the well-funded bank lobby. Labor, under Hawke and Keating, finalized the destruction of the ‘Peoples Bank’ under the catch-phrase: “Open up the banking system to international competition”. The bank system of Australia was effectively sold off to foreign private banking interests. Debt within Australia has since risen to unprecedented levels.

When a Public Bank is instituted, it is not simply that the bank lends to the government. In fact, it may not lend to the government at all. It is the areas of the economy to which it lends that is significant. Here is a list of some of the lending actions of the ‘Peoples Bank’, before being crippled by foreign interests:

In 1923, the private banks united against the Commonwealth Bank and refused to cooperate. Sir Denison Miller died in June 1923 and was mourned as few public men in Australia have been mourned. [3] The private banks gained the upper hand with support from the new incumbent government. The new government set about strangling the Commonwealth Bank with the passing of Commonwealth Bank Amendment Bill. The control of the bank passed to a board of directors who were more in line with private banks.

Mr. Makin said in parliament: “The Government undoubtedly desires to place the Bank in subjection to private banking institutions, and to prevent it from fulfilling the real purpose for which it was established. It is to be prevented, by unsympathetic administration, from functioning in the interests of the general community.”[3]

Mr. Charlton stated in parliament: “the Bill was nothing less than an attempt to kill the Bank” [3]

When the Bruce-Page Government Bill was passed all manner of problems arose. There was an immediate cull in credit by the private banks to the wool industry and the price of wool dropped significantly because the private banks refused to extend credit to wool buyers irrespective of what security was provided. [3] The dire treatment of the farming industry by the freshly empowered banks and the Commonwealth Bank dancing to the tune of the private banks caused an uproar from the farming community. To give the illusion of assistance to a beleaguered farm industry, a Rural Credits Department of the Commonwealth Bank was created. However, farm loans were commonly routed through private banks and the loan arrangements rorted by the private banks. [3] The Rural Credits Department was effectively a rort to subsidize the private banks. [3]

The good times were over for Australia. Labor Prime Minister Bob Hawke completed the task of killing off the ‘People’s Bank’ by initiating its privatization. ‘Privatization’ is a clever word for transferring public assets to private organizations often in sweetheart deals. It is a necessary process to cover for the vast quantity of debt owed to these private entities which is neutralized by vast transfers of public assets to the private entities. The Paul Keating government continued with the destruction of the ‘People’s Bank’ in 1993. In an ironic move, the Labor Party of Australia had gone from champion of the ‘People’s Bank’ in 1891 to destroyer of the ‘People’s Bank’ in 1993. The destruction task was finished by John Howard in 1996. Since the passing of the ‘People’s Bank’, the burden of taxation has increased, the national debt has risen, foreign debt has grown, and foreign ownership has increased. On a per head basis, we have a very high level of debt.

A change is unlikely as is demonstrated by the words of Joe Hockey: “As we have seen over the last 30 years, Mr. Speaker, Governments should not be involved in Banking.”