1151 Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Policy in Australia

Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Policy

in Australia

Newsletter published on March 28, 2020

This material, and more on Coombs, is at http://mailstar.net/coombs.html  .

Dr H. C. "Nugget" Coombs was Governor of Australia's publicly-owned

Commonwealth Bank (from 1960 renamed the Reserve Bank of Australia) from

1949 to 1968, when I was growing up; his signature was on all of our

bank notes.

He helped create our leading University (ANU), and was later its Chancellor.

He led the campaign for a treaty between Aboriginal and non-Aboriginal

Australia. Aborigines nicknamed him "short father".

But Coombs also advocated Free Trade - as he says in his book Trial

Balance - which has undone the Full Employment policy he had espoused.

Subsequent to that article (1974), he produced a report for the Whitlam

Government whose implementation has ruined Rural Australia, and created

the Welfare State which has destroyed family life and disrupted the

transmission of Aboriginal Culture.

Gough Whitlam, Prime Minister from 1972-5, reveals that it was Nugget

Coombs who was behind the 25% drop in tariffs Whitlam implemented.

The material below, and more on Coombs, is at

http://mailstar.net/coombs.html  .

Other People's Money

by H. C. Coombs

Australian National University Press, Canberra 1971

The English, Scottish and Australian Bank Research Lecture, University

of Queensland, 15 September 1954. Reproduced by permission of the

University of Queensland Press.

{p. 9} The Development of Monetary Policy in Australia

THERE has been in recent years a change in the attitude towards monetary

policy. Most of us can remember when anything which had anything to do

with money was both in the mediaeval and modem sense of the term

something of a mystery; an activity carried on by an exclusive group

behind closed doors.

In these times almost anybody is prepared to express views on monetary

and banking policy - some of them less well-informed than they might be.

Although those responsible for monetary policy act in the light of the

fullest knowledge available, and I believe with a high sense of

responsibility, it is important that monetary as well as other economic

problems should be the subject of analysis and discussion.

The mystery element in monetary policy was sharply reduced with the

emergence of what has been described as the 'Keynesian Revolution' in

economics. The Keynesian analysis of the economic system provided the

means by which the effects of monetary policy could be assessed. The

essence of the Keynesian analysis was that in a market economy the level

of production and employment is determined by the level of spending;

spending by households, by firms and businesses, and by public

authorities and government. And consequently it followed that there is a

level of spending which is sufficient to employ the whole of the labour

and available resources of the economy. If spending falls short of that

level the economy will experience unemployment and resources will be

idle. On the other hand, if spending exceeds that level, since output

and employment can be increased no further, the increased spending will

show itself in rising prices and shortages of goods, labour, and materials.

This over-simplified version of the Keynesian analysis brings out the

significance of spending on employment and production and thereby

provides us with a criterion by which monetary policy can be tested.

What will be the effect of a given policy on spending? Would such an

{p. 10} effect be appropriate in the current condition of employment and

production?

Any given piece of expenditure can be financed from one of four sources

(or a combination of these sources):

(1) new savings;

(2) accumulated reserves;

(3) money borrowed, other than from a bank;

(4) money borrowed from a bank.

The last source differs from the first three because when money is lent

by a bank it passes into the hands of the person who borrows it without

anybody having less. Whenever a bank lends money there is, therefore, an

increase in the total amount of money available.

Spending can be influenced by the amount of money which is available in

a community and also by the freedom with which people will draw upon

their stocks of money to spend or lend. It can be influenced also by the

willingness of banks to lend. Since monetary policy can influence both

the supply of money and the willingness of banks to lend, and

consequently the total volume of spending, there is a close connection

between the monetary policy and levels of employment and production.

Monetary policy can be examined, either in prospect or retrospect, by

tracing its effects on spending, production, and employment and judging

whether these effects are appropriate to current circumstances.

Monetary policy is not good or bad in itself. Almost any form of

monetary action can be justified in some circumstances and can be

utterly wrong in others. For instance, I can remember when people used

to get very agitated about a central bank lending to its government.

Such loans, like any other form of monetary action, are good or bad

according to the circumstances in which they are made. We must beware of

an approach to monetary policy in terms of rigid rules. The test of

monetary policy is in its effects.

With these things in mind we can turn to the development of monetary

policy in Australia over the last few decades. It is an interesting

thing that the first result of the emergence of the Keynesian analysis

was rather to push monetary policy as such into the background. For a

while it came to be regarded as purely incidental to public expenditure

policy and consequently as having little initiative of itself. This

tendency arose largely from the conviction that grew out of the

depression of the 1930s, that there was an inherent tendency in a market

economy for expenditure to be insufficient to sustain employment and

production. If this conviction were true, monetary policy became simply

the means to increase expenditure - a task in which the initiative

needed should properly be with governments, businesses, and individuals;

the banking system acting as the responsive servant of governments and

{p. 11} of industry to provide finance as calle;d upon. In a period of

substantial under-employment of resources is was perhaps not an

unreasonable over-simplification. It was clear that almost anything

which increased the level of expenditure would overall have desirable

effects. In such a situation monetary policy inevitably came to be

looked on as a secondary and rather passive instrument of economic policy.

The war pushed monetary policy even further into the background. The

economic problem of the war was to divert the physical and human

resources of the economy to the greatest possible extent to activities

associated wit e war. Such a diversion, once resources were fully

employed, required the withdrawal of resources away from other

activities. In financial sense these two aspects of wartime policy were

reflected tremendous expenditure by government, and by measures to

restrict expenditure by all other persons, firms and authorities which

might require the production of goods not strictly necessary for war

purposes. The government's military expenditure was financed from the

proceeds of taxes and public loans but also by borrowing from the

Central Bank. Measures to restrict other expenditure included taxation

and loan raising but also a variety of more direct limitations. By

rationing and by various forms of control people were prevented from

spending. Furthermore, price control was imposed on the whole range of

goods available so that the amount of money which could be spent on

civil goods was limited. As a result people and businesses found they

earned far more money than they could spend even after taxes, and there

was steadily built up a large accumulation of deposits in the banks and

of notes in the hands of the public. By the end of the war, the volume

of money was 120 per cent higher than it had been at the outbreak of the

war. Thus throughout the war the role of the monetary authority was the

largely passive one of providing the financial needs of government to

the extent that these could not be met from taxes and public loans, and

the task of limiting other forms of expenditure and restraining the

inflationary tendencies inherent in this form of finance was undertaken

primarily by the government through direct controls. [...]

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