A Brief History
In 1911, legislation established the Commonwealth Bank of Australia. In 1959, this original body corporate was preserved as the Reserve Bank of Australia (RBA) in legislation, specifically to carry on the central banking functions; at that same time, the commercial and savings banking functions were transferred into a new institution, which carried on the old name of Commonwealth Bank of Australia.
With the Federation of the Australian States into the Commonwealth of Australia, the Australian Parliament assumed power to make laws with respect to banking and currency. In 1911, the first Commonwealth Bank Act gave the Bank only the ordinary functions of commercial and savings banking; the Bank did not specifically have a central banking remit and it was not responsible for the note issue. Management of the Bank was vested in the Governor. The Bank opened for business in mid 1912. At that time, the note issue was administered by the Australian Department of the Treasury, which had taken it over from the private trading banks and the Queensland Government.
In 1920, responsibility for the note issue was transferred from the Treasury to a Notes Board (consisting of four members, appointed by the Government). The Governor of the Bank was ex officio a member of the Notes Board. The administration of the note issue was undertaken by the Bank, though the Bank and the Notes Board were formally independent of each other.
In 1924, the Commonwealth Bank Act was amended and the Bank was given control over the note issue. Management was then vested in a board of eight directors, including ex officio the Governor and the Secretary to the Treasury. From this time until 1945 (when there were major changes to the legislation), the Bank gradually evolved its central banking activities, initially in response to the pressures of the Depression in the early 1930s and later by formal, albeit temporary, expansion of its powers under wartime regulations. These included exchange control and a wide range of controls over the banking system (including authority to determine advance policy and interest rates, and to require private banks to lodge funds with it in special accounts).
The new Commonwealth Bank Act and the Banking Act, both of 1945, formalised the Bank's powers in relation to the administration of monetary and banking policy, and exchange control. Under the 1945 legislation, there ceased to be a board, which was replaced by an advisory council of six, comprising entirely officials from the Bank and the Treasury; the legislation specified that the Governor was responsible for managing the Bank. However, legislation in 1951 established a new board (at that time of ten members), including the Governor, Deputy Governor and the Secretary to the Treasury, and maintained the responsibility of the Governor for managing the Bank. With minor variations in the number of members, this has been the structure of the Bank's Board since that time.
As indicated above, the Reserve Bank Act 1959 preserved the original corporate body, under the new name of the Reserve Bank of Australia, to carry on the central banking functions of the Commonwealth Bank, which had evolved over time; other legislation separated the commercial banking and savings banking activities into the newly created Commonwealth Banking Corporation. The Reserve Bank Act 1959 took effect from 14 January 1960.
There were no major changes in the functions of the RBA until the abolition of Exchange Control following the float of the Australian dollar in 1983. There had, however, been a gradual movement to market-oriented methods of implementing monetary policy, away from a system of direct controls on banks, and in the five years following the appointment of a major financial system inquiry (the Campbell Committee, in 1979), the Australian financial landscape was transformed to a virtually fully deregulated system. At the same time, the RBA gradually built up a specialised banking supervision function.
Another inquiry into the Australian financial system (the Wallis Committee) was announced in 1996. There were two major outcomes of this inquiry for the Bank, both taking effect from 1 July 1998. The banking supervision function was transferred from the RBA to a newly created authority, the Australian Prudential Regulation Authority, which was to be responsible for the supervision of all deposit-taking institutions. The Reserve Bank Act was amended also to create a new Payments System Board, with a mandate to promote the safety and efficiency of the Australian payments system. New legislation – the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998 – was introduced, giving the Bank relevant powers in this area.
A further inquiry into the Australian financial system was announced by the new Government late in 2013. The terms of reference are broad-ranging, covering aspects such as: the consequences of developments in the Australian financial system since the 1997 inquiry and the global financial crisis; the philosophy, principles and objectives underpinning the development of a well-functioning financial system; and the emerging opportunities and challenges that are likely to drive further change in the global and domestic financial system. The Reserve Bank made a detailed submission to the Financial System Inquiry in March 2014.
The Reserve Bank Board's obligations with respect to the formulation and implementation of monetary policy are laid out in the Reserve Bank Act. Section 10(2) of the Act, which is often referred to as the Bank's 'charter', says:
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia.
In 1993, the objective of price stability was outlined publicly by the then Governor, Bernie Fraser, as a rate of inflation which was held to an average of 2-3 per cent over a period of years. [The history of the RBA's initial inflation targeting was given in a speech by Glenn Stevens in 1999, 'Six Years of Inflation Targeting'.]
In August 1996, the then Governor-designate of the Reserve Bank, Ian Macfarlane, and the then Treasurer, Peter Costello, jointly issued a Statement on the Conduct of Monetary Policy, which essentially reiterated and clarified the respective roles and responsibilities of the Reserve Bank and the Australian Government in relation to monetary policy and provided formal Government endorsement of the Reserve Bank's inflation objective, which had been in place informally for several years. Revised, though essentially unchanged, statements were published in July 2003 and September 2006. In December 2007, following the change of Government, a new Statement on the Conduct of Monetary Policy was jointly issued by the then Treasurer, Wayne Swan MP, and the Governor of the Reserve Bank, Glenn Stevens. This Statement did not change the policy objectives of the Reserve Bank as outlined in the earlier statements, but incorporated substantive amendments relating to the independence of the Reserve Bank and covering practices regarding transparency and communication. A revised Statement on the Conduct of Monetary Policy was issued following the 2010 election, which explicitly covered the Reserve Bank's mandate for financial stability.
With the change in Government in October 2013, a new Statement was jointly issued by the Treasurer, Joe Hockey MP, and the Governor, Glenn Stevens. As in the past, the centrepiece of the current Statement remains the inflation targeting framework, which has formed the basis of Australia's monetary policy framework since the early 1990s.
Accounts of the Australian monetary system and the RBA's development are contained in the following books, etc.:
Butlin SJ (1968), Foundations of the Australian Monetary System 1788–1851, Sydney University Press, Sydney.
Cornish S (2010), The Evolution of Central Banking in Australia, Reserve Bank of Australia, Sydney.
Giblin LF (1951), The Growth of a Central Bank: The Development of the Commonwealth Bank of Australia, 1924–1945, Melbourne University Press, Melbourne.
Schedvin CB (1992), In Reserve: Central Banking in Australia, 1945–75, Macmillan, Sydney.
Macfarlane IJ (2002), ‘Sir Leslie Melville: His Contribution to Central Banking in Australia’, Remarks at the Inaugural Sir Leslie Melville Lecture and the formal launch of the Toyota-ANU Public Lecture Series, Canberra, 22 March.
Papers relating to the various financial system inquiries are:
RBA (2014), Submission to the Financial System Inquiry, March.
Reserve Bank of Australia (1979), ‘Submission to the Committee of Inquiry into The Australian Financial System’, Reserve Bank of Australia Occasional Paper No. 7.
Committee of Inquiry into the Australian Financial System (1980), Australian Financial System: Interim Report (K Campbell, chairperson), Australian Government Publishing Service, Canberra, May.
Committee of Inquiry into the Australian Financial System (1981), Australian Financial System: Final Report (K Campbell, chairperson), Australian Government Publishing Service, Canberra, September.
Reserve Bank of Australia (1991), ‘Submission to the House of Representatives Standing Committee on Finance and Public Administration Inquiry into the Australian Banking Industry’, January.
House of Representatives Standing Committee on Finance and Public Administration (1991), A Pocket Full of Change: Banking and Deregulation (S Martin, MP, chairperson), Australian Government Publishing Service, Canberra.
Reserve Bank of Australia (1996), ‘Submission to the Financial System Inquiry’, Reserve Bank of Australia Occasional Paper No. 14.
Financial System Inquiry (1996), Financial System Inquiry Discussion Paper (S Wallis, chairperson), Australian Government Publishing Service, Canberra. Available at <http://fsi.treasury.gov.au/content/DiscussionPaper.asp>.
Reserve Bank of Australia (1997), ‘Supplementary Submission to the Financial System Inquiry’, Reserve Bank of Australia Occasional Paper No. 15.
Financial System Inquiry (1997), Financial System Inquiry Final Report (S Wallis, chairperson), Australian Government Publishing Service, Canberra. Available at <http://fsi.treasury.gov.au/content/FinalReport.asp>.