By Robert Barwick
After governments apply an emergency
tourniquet to the present economic
crisis, in the form of enacting a Glass Steagall-style separation of essential banking services from speculative investment
banking, the next essential step to a global
economic recovery is to establish national
banks.
Glass-Steagall will stop the hyperinflationary haemorrhaging, but that’s all; to generate a recovery, to turn around decades of physical economic decay and collapse,
governments must replace the present
system of privately-controlled central banks
with government-owned-and-controlled
national banks that can “recapitalise” the
economy by directing public credit into
rebuilding infrastructure and productive
industries.
The private sector is not capable of the
scale of investment required to start a recovery, because under
Glass-Steagall, when only deposits and essential banking services
have government protection, most of the financial assets of the
present system will be shown to be worthless and will vapourise.
The precedent for the national banks that governments must
establish, and how they must operate, is the system of national
banking invented in the United States of America by the first U.S. President George Washington’s Treasury Secretary Alexander
Hamilton.
Australia is blessed with its own precedent, the original Commonwealth Bank founded by immigrant American politician King
O’Malley, on the model of Alexander Hamilton’s national bank.
Hamilton’s system of public credit
The United States emerged bankrupt from its 1776-1781
War of Independence against the British Empire and the British
system of monetary imperialism. Each of the 13 states owed
unpayable debts. Alexander Hamilton, who had been aide-de-camp to General Washington during the war, organised a financial
system to repay the debts in such a way that its creditors grew
so confident in getting their money back, that debt certificates
became a new national currency. In turn, the new federal government used the confidence in its new currency, to re-direct that
currency as credit into “internal improvements”, which today we
call infrastructure, and manufactures, through the agency of the
world’s first national bank, the First Bank of the United States.
Here’s how Hamilton did it.
First, the states willingly transferred their debt on to the new
federal government. Among the first Acts the new Congress
passed in 1789-90 were an Act to provide for a system of taxation to raise revenue, and another Act that authorised Hamilton
to raise a new loan to pay out entirely the existing debt, which
new loan the taxation from the first Act was earmarked to
guaranteeing. Private citizens “subscribed” to the new loan, at
a lower interest rate to the old debt, of four per cent rather
than six per cent. The interest-bearing debt certificates of the
new loan quickly circulated as currency. Confidence in the debt
was such that banks and private citizens happily accepted the
paper debt certificates as payment in lieu of gold and silver, so
more currency was able to circulate more
freely than if only scarce gold and silver
were accepted. In 1791 Congress enacted
Hamilton’s plan to establish a national
bank, with initial capital of $10 million. The
federal government put up $2 million in
gold and silver; private investors subscribed
the balance of $8 million of capital stock.
Interestingly, payment for each private share
comprised three parts debt certificates, and
one part gold or silver. This enabled the
government’s existing arrangement to repay
debt to private individuals to be “recycled”
as the majority capital of the national bank,
available for public investment.
The significance of Hamilton’s bank is
that it injected into the financial system
an “intention” to further the common
good, or as the U.S. Constitution put it, "to promote the general welfare”. Prior
to the bank, governments were limited financially to how much
tax revenue they could raise and how much they could borrow
from private sources. The banking system itself either had no
intention—being the sum of countless individual decisions chasing
the most profit—or where an intention did exist, it was that of
the private financial oligarchy’s to keep governments subservient
to their monetary power. Hamilton’s national bank “harnessed”
the combination of government and private financial resources
that comprised its start-up capital and subsequent deposits, and
directed those resources as public credit into developing the
new nation in a way that benefitted everybody.
In his final Report on Public Credit in 1795, Hamilton described
the functioning of America’s unique credit system, emphasising:
its focus on the physical economy; the superiority of credit over
money, or “capital”; and that the value underpinning the system
was the connection between credit and future productivity, not
any reliance on reserves of gold or silver.
The American credit system vs. the British monetary system
The success of the First Bank of the United States made
America’s enemies determined to destroy it. In 1804 a British
agent, Aaron Burr, assassinated Hamilton in a duel, and when the
bank’s 20-year charter expired in 1811, it wasn’t renewed. However, four years later in 1816 Congress chartered the Second Bank of the United States which, under its manager Nicholas
Biddle, and the administration of President John Quincy Adams,
fostered an amazing period of economic development, called
at the time “internal improvements”. The British struck again in
1836, through the administration of President Andrew Jackson, a
protégé of Aaron Burr, and the Second Bank’s 20-year charter was
also not renewed. One of the staunchest defenders of national
banking against Andrew Jackson’s attacks was a young Illinois
legislator named Abraham Lincoln, who introduced himself during his 1832 campaign thus: “I am humble Abraham Lincoln... I am
in favour of a national bank, the internal improvement system, and a
high protective tariff.”
Lincoln became President in 1861 intending to restore
America’s national banking system. To stymie him, Wall Street
and the City of London tried to starve the government of funds by refusing to buy government bonds, so
Lincoln put through Congress on 25 Feb.
1862 the Legal Tender Act to issue paper
currency backed only by the government,
called the greenback. His administration
created $450 million in greenbacks during
the Civil War, financed by $500 million in
bonds sold to individual citizens instead
of banks; the greenback became a new
national currency, replacing the chaos of
7000 different currencies the U.S. had fallen
into since the Second Bank expired in 1836.
Australia’s Hamiltonian bank
Many nations have gone on to adopt
limited versions of Hamilton’s public credit
system, but Australia is the only other nation in the world to have had a dedicated
national bank, thanks to the genius efforts
of an immigrant American politician, King
O’Malley. In 1909 O’Malley declared in federal Parliament, “I am
the Hamilton of Australia. He was the greatest financial man
who ever walked the earth, and his plans have never been improved upon... The American experience should determine us to
establish a national bank which cannot be attacked.” O’Malley’s
tireless organising finally achieved the establishment of the
Commonwealth Bank, enacted by Parliament in 1911 and commencing operations in July 2012 under Governor Sir Denison
Miller. Initially the Commonwealth Bank was more limited than
the bank of “issue, reserve, exchange and deposit” O’Malley
fought for, because it would be a number of years before it had
the power to issue the nation’s currency and maintain the private
banks’ reserves, but nonetheless it immediately empowered the
government to direct public credit into national development.
The Commonwealth Bank was instrumental in funding the
Indian-Pacific Railway and the WWI war effort, and stopping a
run on the private banks.
When Sir Denison Miller died in 1923, the anti-national
bank government of British fop Stanley Melbourne Bruce replaced his position of sole governor with a board of directors,
drawn largely from private business. This neutered the national
bank—it retained its powers, but its new management refused
to use them, arguing against any “unfair” competition with the
private banks. This led directly to the enormous political fight
during the Great Depression, when the management of the
Commonwealth Bank, under anti-Labor chairman Sir Robert
Gibson, refused the Labor government’s instructions to the
government bank to issue funds for public works to relieve the
crisis of 30+% male unemployment. “I bloody well won’t,” was
the unelected Gibson’s response to the elected representatives
of the bank’s owners—the people. In 1936, a Royal Commission into the banking system investigated the Commonwealth
Bank’s lack of action during the Depression; future Labor Prime
Minister Ben Chifley served on the Royal Commission. Among
its findings, the Royal Commission declared, very significantly,
that the government should be the ultimate authority over the
financial system—a finding that flew in the face of the private
Money Power’s demands that government’s submit to their
power. The Royal Commission’s findings were ignored by the Joe
Lyons-Robert Menzies government, but in the 1937 federal election campaign, Labor leader John Curtin used his speech to the
party’s campaign launch at the Fremantle Town Hall to demand
the restoration of the Commonwealth Bank’s original charter, so
it could be freed from the vices of private finance and returned to
government control. “If the Government of the Commonwealth
deliberately excluded itself from all participation in the making or
changing of monetary policy it cannot govern except in a secondary degree,” declared Curtin.
It was only when Curtin and Chifley
took office at the height of WWII in 1942
that the Commonwealth Bank was restored to being able to function again as
a national bank. Curtin and Chifley used
emergency war-time powers to implement
the findings of the 1936 Royal Commission, which gave the Commonwealth Bank absolute authority over the private banks,
so that the government could ensure that
all public and private financial resources
were maximised in support of the war
effort. Under the Commonwealth Bank,
Australia during WWII functioned as a public credit system, not a monetary system.
The banking system worked so well that
at war’s end Prime Minister Chifley moved
to make the war-time banking controls
permanent. However, with the war over
the private banks dropped any pretence of cooperation and
furiously attacked Chifley’s plans, leading to the 1949 fight over
bank nationalisation, the Privy Council striking down Chifley’s
bills, and Labor’s election loss. The new Prime Minister Robert
Menzies again neutered the Commonwealth Bank on behalf of
his financial backers from Collins Street, splitting off its power
over the private banks into the separate Reserve Bank, and leaving
the Commonwealth as mostly a savings bank.
Commonwealth National Credit Bank
In 1994, just as Paul Keating was finalising the privatisation
of the Commonwealth Bank, the CEC publishedlegislation for
a new national bank in its special platform document called
Sovereign Australia II: A Legislative Programme to Save Australia. The
draft legislation would enact a Commonwealth National Credit
Bank, owned and controlled by the government, but with a board
comprising the Prime Minister and Premiers of each state.
The new bank would replace the existing Reserve Bank. It
would make loans at 1-2 per cent interest to all three tiers of
government for infrastructure, and to private business in productive industries, such as farmers and manufacturers. The money for
lending would come from two sources: its deposits, and created
credit. In terms of deposits, the bank will hold all of the deposits
of the federal government, any willing state government, and
most if not all local councils. Private businesses and individuals
would also be able to deposit funds. This is instantly an enormous
reserve of funds available for lending.
In terms of created credit, the bank would have the same
power to create funds out of thin air, so to speak, that central
banks have and use today. The difference is that the CNCB will
only create credit to invest in highly productive infrastructure
and industries. Under the provisions of the CNCB bill, it must
demonstrate that its investments increase the power of the
national physical economy, as measured in increasing energy flux
density and potential relative population density. In other words, it must be able to show that its investments enable Australia as a
whole to support a growing population at an increasingly higher
standard of living. The CNCB is forbidden from any involvement
in “open market operations” or any other schemes that privately-controlled central banks use presently to create money.
Used scientifically, the power to create credit provides a
virtually unlimited source of public credit for developing the
physical economy. Never again will governments claim there isn’t
enough money to build important infrastructure. The only limit
to creating credit is the availability of manpower and materials.
Read the schematic (2.9MB JPEG image) for specific details on how the CNCB will operate, or download a smaller image (794kb)
Continue onto Blueprint for Economic Development