For Part 1 of this series, click here.

The 1930s “Great Depression” had seen a monumental waste of human and material resources, and sharpened social and political divisions in Australia. Banks had contributed to the economic collapse through unsound lending practices, while the Commonwealth Bank-sponsored government austerity program, the Premiers’ Plan, exacerbated its effects by cutting public spending by 20 per cent – hitting the poor, unemployed, and public sectors hardest.

[caption id="attachment_15131" align="alignright" width="300"] Bomb damage to Australia's oldest bank, Darwin,1944 (Northern Territory Library, Kevin Ryan Collection, PH0811/0003, Photographer: Kevin J Ryan)[/caption]

Australian government policy towards the banking system in the decade after the Depression evolved as a process of developing strategies to forestall the recurrence of such a collapse with its unwanted social and political consequences. Economic stability within a capitalist market economy was the primary objective, to be achieved through a strengthened role for government within the banking system. What this meant, though, changed over time.

The implied contest over the proper role for banking in Australian society can be characterised as disputation over the substance of “banking business” – the concept central to the legal recognition and regulation of banks (see updated The Laws of Australia Subtitle 18.2 “Types of Financial Institutions” ). The traditional view was that the banking system is, essentially, a mechanism for mobilising capital through the acceptance of deposits and their utilisation as loans (Commissioners of State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457).

In 1937, the Royal Commission on the Monetary and Banking Systems, set up by the conservative United Australia Party/Country Party Government, recommended measures such as requiring private trading banks to keep a deposit with the government-owned Commonwealth Bank representing a proportion of their liabilities. The Commission’s approach was about moderating banking activities, with a modicum of centralised direction as a precaution against reckless practices. The outbreak of the Second World War in 1939 intensified this trend towards strengthening banking regulation, as both conservative and Labor Federal Governments mobilised Australia’s resources, economic and human, for the war effort. Secondary industries, such as shipbuilding, aircraft construction, machine tools, munitions and armaments, and chemicals experienced rapid development during the war years.

In 1942, with Australia facing the prospect of invasion by Japan, efficient utilisation of economic capacity demanded greater mediation of market forces. The Curtin Labor Government, using the wartime powers available to it under the Constitution, implemented National Security Regulations to ensure the banking system did not operate in ways that threatened economic stability, and to simultaneously direct finance towards serving the economic demands of the war effort. Measures taken included controlling interest rates, prohibiting speculative practices and requiring banks to lodge funds with the Commonwealth Bank.

The measures set a precedent for centralised public direction of the banking system, a development furthered with the Labor Federal Government’s enactment of the Banking Act 1945 (Cth) and the Commonwealth Bank Act 1945 (Cth). This legislation aimed at strengthening Federal Government control over the Commonwealth Bank and, through it, over the private banks; and for the banking system to have a broader role in the economy. The Commonwealth Bank was required to work for currency stability, full employment, and national economic prosperity and welfare. This re-conceptualisation of its “business” included the banking system assisting with the implementation of public policy for the achievement of socially worthwhile objectives.

These reforms were made by a government with a pragmatic redistributive ethos against a background of a strengthened and assertive labour movement determined to avoid recurrence of economic depression. Even so, the consolidation of the Commonwealth Bank’s position as Australia’s central bank was intended to supplement, not supplant, the activities of the private banks. This was implicit in the stabilising role the Commonwealth Bank was required to fulfil. Through its control of interest rates, and requirements that private banks operate under licence and retain a proportion of their reserves with it, the Commonwealth Bank’s regulation of credit was intended to guard against inflation and depression risks in the economic cycle. It would also compete with the private banks in the marketplace – including through offering housing loans.

For the Government’s opponents, the measures amounted to “creeping socialism”. The 1945 legislation was challenged in the High Court in Melbourne Corp v Commonwealth (State Banking Case) (1947) 74 CLR 31. The Government was defeated, the High Court ruling in favour of the conservative conception of the essential function of banking: to receive deposits and loan money for investment in a free market.

The Chifley Labor Government subsequently legislated to nationalise the private banking system in the Banking Act 1947 (Cth). In reaction, there was a concerted mobilisation by the private banks in opposition to the new legislation and it was the subject of another High Court challenge: Bank of New South Wales v Commonwealth (Bank Nationalisation Case) (1948) 76 CLR 1. The Court held that the legislation contravened s 92 of the Constitution, which provides for freedom of trade, commerce and intercourse among the States.

As s 92 operated to protect trade, commerce and intercourse “across State boundaries”, the Court considered whether the legislation would have been valid with respect to the Commonwealth taking over the intra-state activities of the private banks. It held that the prohibition of private banking provided for in the Act, through the acquisition of the shares and businesses of the private banks and notice to them to cease operating, would, in its factual implications via the banks’ loss of staff and assets, prevent them from carrying on inter-state business as well as intra-state business. The intra-state and inter-state functions of the private banks were deemed inseparable. The Privy Council upheld the High Court’s decision in Commonwealth v Bank of New South Wales (1949) 79 CLR 497.

Unsurprisingly, the pillars of the legal system found in favour of maintaining the operational integrity of the private banks, in effect according with the traditional legal conception of “banking business” and the unfettered operation of private banks in a free market context it implied.

Still, the idea that the banking system has a social role to play in the economic life of the country, including with some centralised, public direction of the system, had taken hold. The course that government banking policy would take in the ensuing decades would reflect this but it would not be constant. There would also be a deregulatory thrust focused on enhancing competition within the banking system and increasing concentration of banking culminating in the emergence of the “Big Four” banks.

Part 3 of this series will review these developments and their implications, and consider possible futures for Australian banking.

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