The Reserve Bank's origins can be traced back to thecreation of the Commonwealth Bank of Australia in1911. The Commonwealth Bank was established as agovernment-owned savings and trading bank. Oversubsequent decades it progressively acquired moreof the responsibilities of a central bank. These centralbanking powers were formalised at the end of theSecond World War through the CommonwealthBank Act 1945 and the Banking Act 1945.
Over time, the organisation's central banking activitiesdeveloped to the extent that warranted a separatebody. This was also important from a governanceperspective so that the Commonwealth Bank was notboth a regulator and a competitor of other commercialbanks. The Reserve Bank Act 1959 separated thecommercial activities of the Commonwealth Bank fromits central banking functions. The Commonwealth Bankwould be renamed the Reserve Bank of Australia andwould act as the nation's central bank. The newlycreated Commonwealth Banking Corporation wouldoperate as a trading bank. The Reserve Bank of Australiacommenced operations on 14January1960.
- 1910: Legislation is passed by the AustralianGovernment to create a national system ofpaper currency in Australia.
- 1911: The Commonwealth Bank of Australia iscreated as a government-owned trading andsavings bank.
- 1913: The Commonwealth Treasurybegins printing the first purpose-designedAustralian banknotes.
- 1914–18: The Commonwealth Bank raises loansfor the Australian Government to fund militaryspending in the First World War and managesresettlement, retraining and housing schemesfor returned servicemen.
- 1920: The responsibility for banknote issueis passed from the Commonwealth Treasuryto the new Australian Notes Board. TheBoard was chaired by the Governor of theCommonwealth Bank and was administered bythe Commonwealth Bank.
- 1924: A Board of Directors is created for theCommonwealth Bank.
- 1924: The Commonwealth Bank takes fullresponsibility for the issue of Australia'sbanknotes from the Treasury and the AustralianNotes Board is abolished.
- 1927: The Commonwealth Savings Bank gainsseparate legal status, but remains a part of theCommonwealth Bank.
- 1930: Treasurer E G Theodore tables legislationto create a ‘Central Reserve Bank’ for Australia.The bill passes the House of Representatives butfails to pass the Senate.
- 1939–45: The Commonwealth Bank raises loansto fund the war effort and closely advises thegovernment on wartime economic policy.
- 1945: The Commonwealth Bank Act 1945 andBanking Act 1945 are passed, giving a legislativebasis to the central banking roles and functionsthat the Commonwealth Bank had assumedover previous decades.
- 1953: The Commonwealth Trading Bankis given a separate legal status, leaving theremaining entity – the Commonwealth Bank –as the nation's central bank.
- 1959: The Reserve Bank Act 1959 is passed,which separates the Commonwealth Bank'scentral banking functions from its commercialbanking activities. The Commonwealth Bank isrenamed the Reserve Bank of Australia and isconstituted separately from the newly createdCommonwealth Banking Corporation.
- 1960: The Reserve Bank of Australiacommences operations as Australia'sindependent central bank. The ReserveBank Board, chaired by the Governor of theReserve Bank, has responsibility for conductingmonetary and banking policy so as to bestcontribute to: stability of the currency;maintenance of full employment; and theeconomic prosperity and welfare of the peopleof Australia.
- 1991: The Commonwealth Banking Corporationis privatised and becomes known as theCommonwealth Bank.
- 1998: The Reserve Bank's banking supervisionfunction is transferred to the newly createdAustralian Prudential Regulation Authority (APRA).
- 1998: The Payments System Board is createdwith the Governor of the Reserve Bank as Chair.Its responsibility is to determine the ReserveBank's payments system policy. It exercises thisresponsibility in a way that will best contribute tocontrolling risk in the financial system; promotingthe efficiency of the payments system; andpromoting competition in the market forpayment services, consistent with the overallstability of the financial system.
A brief history of the Reserve Bank of Australia
Before a national system of payments
One of the defining features of a central bank isits responsibility to issue the nation's currency andensure that people are confident in it as a means ofpayment. Before European settlement, Indigenoustrade operated with complex systems of exchange.
During the colonial period there was not a nationalcurrency in Australia. Early trade within andbetween the colonies of Australia was conductedwith a number of methods such as:
- barter (directly exchanging one good or service for another)
- quasi-currencies (such as rum)
- foreign currencies that had been brought to the colony (such asSpanish dollars, Dutch guilders and ducats, Indian mohurs and rupees and Portuguese johannas)
- promissory notes (or IOUs).
As the colonial economy grew, private banks werecreated and began issuing their own banknotes.The eventual failure of many of these banks inthe depression of the early 1890s caused a crisisof confidence in these private banknotes. This ledto calls for a national currency, uniform bankinglaws and a central bank. These proposals came tofruition incrementally over the decades followingFederation.
1901 to 1911: The introduction of a national currency
The Australian colonies were united in afederation in 1901. The Constitution of the newCommonwealth of Australia empowered theAustralian Parliament to make laws in relation to‘currency, coinage and legal tender’, ‘banking …and the issue of paper money’. However, it was notuntil the Australian Notes Act 1910 passed throughparliament, that control over the issue of Australianbanknotes was given to the CommonwealthTreasury. The first purpose-designed Australianbanknotes to act as a national currency were producedby the Commonwealth Treasury in 1913. A 10 per centtax on the use of private banknotes was introducedto discourage their use and make using the nationalcurrency more attractive to the public.
1911: Creation of the Commonwealth Bank
The legal predecessor of the Reserve Bank – theCommonwealth Bank of Australia – was establishedin 1911. The Commonwealth Bank was to serve asboth a government-owned trading bank and asavings bank. It was the only bank to be supportedby a Commonwealth Government guarantee.Despite earlier proposals, the CommonwealthBank was not immediately given a significantcentral banking role. The responsibility of printingbanknotes was assigned to the Treasury in 1910.Central banking responsibilities were conferred onthe Commonwealth Bank by the government overtime in response to major economic events. At thetime of its creation, the Commonwealth Bank's onlycentral banking function was to act as banker to theCommonwealth Government.
1911 to 1939: The First World War and expanding central bank responsibilities
The First World War saw the CommonwealthBank raise public loans to fund the AustralianGovernment's war effort. This was a historicallysignificant scale of financial activity and theCommonwealth Bank's involvement in itconsolidated its role as the banker to thegovernment. The management of the government'sdebts through local and international borrowingactivities was an important development of thecentral banking responsibilities of the Bank.
The Bank was also involved in the repatriation ofreturned servicemen, funding and managing theconstruction and purchase of homes for servicemenat favourable rates in each state. Furthermore,it funded and coordinated retraining programsfor returned servicemen – an early form of thecentral bank's commitment to the objective offull employment.
Throughout the inter-war years, the functions ofthe Commonwealth Bank gradually broadened.In 1920, the responsibility for the issuing ofbanknotes was transferred from the Treasury to theNotes Board, which was chaired by the Bank. TheBank also began to oversee the administration ofbanknote issue. By 1924, the Bank had taken overresponsibility for printing Australia's banknotes.Through an amendment to the CommonwealthBank Act in 1924, private banks were compelledto clear inter-bank balances by cheques drawnon the Commonwealth Bank. Consequently,they voluntarily deposited funds with theCommonwealth Bank. In response to growingeconomic instability in 1929, the CommonwealthBank was given the power to requisition goldsupplies from private banks.
The Commonwealth Savings Bank gained separatelegal status in 1924, but remained a part of theCommonwealth Bank, with which it shared thesame Board of Directors.
In 1930, Treasurer E G Theodore tabled legislation tocreate a ‘Central Reserve Bank’ for Australia. The billpassed the House of Representatives but failed topass the Senate. In 1937, the Royal Commission intoMonetary and Banking Systems recommended thecontinuation of a composite commercial-central Bank.
1939 to 1945: The demands of another war
The Second World War saw the Bank againcontribute to the raising of loans to fund militaryactivity. With low unemployment and highspending power on one hand, and reducedsupply of consumer goods on the other, the risk ofuncontrolled inflation grew. The raising of war loansfrom the public served to mitigate this risk. This wasone of the earliest and most direct interventions theBank had made in attempting to control inflation.
The Bank also played a prominent role in wartimeeconomic planning, and it formally took on furthercentral banking responsibilities, such as exchangecontrols, interest rate controls and the power tocompel private banks to lodge funds with it in specialaccounts. Under this system, the Bank could requirethat 100 per cent of any increase in bank assets afterSeptember 1939 be lodged in its special accounts.Movement of funds into and out of these accountswas closely monitored and regulated by the Bank.However, these were only temporary wartimepowers.
1945 to 1959: A legislative foundation
With the expiration of these powers at the end ofthe Second World War, new legislation was passed– the Commonwealth Bank Act 1945 and the Banking Act1945.It formalised the Bank's powers in relationto the administration of monetary policy, interestrates, banking policy and exchange rate control. Thiswas the first time the Bank had been formally givena legislated responsibility to pursue macroeconomicobjectives. Commercial banks were required tolodge significant funds in ‘special accounts’ held bythe Commonwealth Bank – the precursors to thedeposit accounts that banks have at the ReserveBank today – to record the value of their ExchangeSettlement balances.
Further organisational delineation of the Bank'scentral banking functions took place when theCommonwealth Trading Bank was given a separatelegal status in 1953. This left the remaining entity, theCommonwealth Bank, as the nation's central bank.The Commonwealth Bank, the CommonwealthSavings Bank and the Commonwealth Trading Bankshared the same Board of Directors.
1959: Separation of the Commonwealth Bank and Reserve Bank of Australia
By the late 1950s, the dual functions of theCommonwealth Bank as both a central bank and atrading and savings bank had become problematic.For some decades, the privately owned commercialbanks in Australia had held the view that theCommonwealth Bank's involvement in these twoareas simultaneously could give it an unfair advantageover other trading and savings banks operating inAustralia. The previous structural reconfigurations didnot fully address these criticisms. The governmentfelt that, in order to maintain public confidence in thenation's central bank, these two functions should beformally separated.
The Reserve Bank Act 1959 separated theCommonwealth Bank into two entities – theReserve Bank of Australia and the CommonwealthBanking Corporation. The Reserve Bank wouldact as the nation's independent central bank, andthe Commonwealth Banking Corporation wouldcontinue operating as a trading and savingsbank. The Commonwealth Bank was renamedthe Reserve Bank of Australia. The old board ofthe Commonwealth Bank was transferred to theReserve Bank, and a new Commonwealth BankingCorporation (consisting of the CommonwealthTrading Bank, the Commonwealth Savings Bankand the Commonwealth Development Bank) wascreated as a new organisation with a new board.
When the Reserve Bank commenced operationson 14 January, 1960, its legislated objectives were tocontribute 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.
These remain the Reserve Bank's objectives today,and are often referred to as the Bank's ‘charter.’
1960 to 1983: An independent central bank
The Reserve Bank moved into a purpose-designedbuilding in Martin Place, Sydney, in early 1965.The decision to locate the Bank's headquarters inSydney rather than Canberra was based on thedesire to maintain the Reserve Bank's independencefrom the political sphere. The location alsomaintained continuity with the Reserve Bank'sestablished presence in Martin Place – the heart ofSydney's banking precinct. Branch offices were alsoestablished in each state capital.
The Commonwealth Banking Corporation remaineda publicly owned savings and commercial bank untilits privatisation in 1991. From this time it has been knownas the Commonwealth Bank.
1983 to the present: The Reserve Bank of Australia today
There have been several changes to the rolesand functions of the Reserve Bank of Australiasince the 1980s, though its overall objectives haveremained the same. Direct controls over bankingactivities gave way to market-orientated methods ofimplementing monetary policy. The Bank adopteda policy of inflation targeting in the early 1990s(See Explainer: Australia's Inflation Target).
While the Bank remains accountable to parliamentand the Australian people, its political independencein conducting monetary policy is central to itsmission and effectiveness as a modern central bank.
The floating of the Australian dollar in 1983resulted in the abolition of the Reserve Bank'scontrols over the exchange rate, though it retainsthe ability to intervene in the event of significantmarket dislocation.
The function of the Reserve Bank as a prudentialsupervisor regulatory agency for the banking sectorwas transferred to the newly created AustralianPrudential Regulation Authority (APRA) in 1998.The same year, the Reserve Bank Act was amendedto create a new Payments System Board, whichis chaired by the Governor of the Reserve Bank,with a mandate to promote the safety, efficiencyand competitiveness of the Australian paymentssystem. Its responsibility is to determine the ReserveBank's payments system policy. It must exercise thisresponsibility in a way that will best contribute tocontrolling risk in the financial system; promotingthe efficiency of the payments system; andpromoting competition in the market for paymentservices, consistent with the overall stability of thefinancial system.
The Governor of the Reserve Bank chairs theCouncil of Financial Regulators (CFR), which has asmembers the Reserve Bank, APRA, the AustralianSecurities and Investments Commission (ASIC)and the Australian Treasury. The CFR memberswork together to contribute to the efficiency andeffectiveness of regulation and to promote stabilityof the Australian financial system.
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