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Answers are in economic history

By Ben Rees - posted Thursday, 22 December 2022

Internationally, contemporary worldwide economic dislocation is obvious across major western economies. Commentators across industry, media, academia, and politics have no answer to major shortcomings of contemporary economics which is characterised by maldistribution of income and wealth, rising inflation, and supply constraints emanating from Covid and Ukraine dislocations. In Australia, the recent Commonwealth election and Victorian state election have made commentators across the full spectrum look amateurish and unable to understand the decline in electoral support for traditional political parties. Answers to both questions lie in understanding economic history and changing electoral demography.

The short answer is that the structural reforms brought about by post 1980's adoption of Thatcherism by the "baby boomer" generation are now being rejected by changed values of Gen Z or millennial generation. Inevitably changing generational values have exposed past "progressive" thinking of the "baby boomer" generation unacceptable to contemporary values. Political parties still dominated by the values of the baby boomers are unable to come to terms with the changed values of the millennials. Similarly, economic policies acceptable to structural reformers are now unable to deliver outcomes acceptable to modern millennials.

Nowhere is criticism more concentrated than modern monetary policy administered by independent central banks. Independent central banking was a distinguishing characteristic of modern monetarism over the closing decades of last century. This short discussion examines modern monetary policy.


Contemporary Economic debate

There is much discussion and debate over the parlous state of the world economy. What is obvious to ordinary people is that contemporary commentators, have no answers except to regurgitate the failed market economics of past generations. For example, amongst leading business people, academics and politicians of the 1930's, the solution to similar economic dislocation was "Above all we must balance the budget". The contemporary version, heard almost daily, is that "Budgets must be brought into balance and expenditure constrained". Meanwhile, modern monetarism places its trust in the 1970's inflation augmented Phillips Curve to manage inflationary expectations

Economic philosophy that underwrote post 1983 structural reforms has lost relevance to changing generational values of contemporary society. There is a need to revisit the economic philosophy inherent in Australia's Constitution to understand why the philosophy of the baby boomer "progressive thinkers" is now unacceptable to contemporary society.

The Australian Constitution a Brief Background

"TheConstitution provides the foundation of and framework for government. It is 'the document in which are set out the rules governing the composition, powers, and methods of operation of the main institutions of government'. These rules have the status of supreme law" Hugh. Emy

The Australian Constitution was written in a period dominated by unfettered classical/ neoclassical philosophy. Between 1872 and 1896, three severe depressions damaged belief in classical/ neoclassical theories. Marx and Engels had published work advocating benefits of communism. This political climate generated an interest in protectionism which ultimately underwrote the mixed capitalist economic system that emerged following federation. Consequently, the Australian Constitution was framed in an environment favourable to government intervention in management of the economy.

In 1890 there had begun a major worldwide depression which subsequently spread to the Australian colonies. Between 1891 and 1900 gross national product declined 13% per head of population across the Colonies. The decline in GNP resulted from, drought, depressed pastoral sector, decline in new railway construction, and cessation of residential and office construction. Under such economic contraction industrial unrest erupted. In 1890, the infamous Maritime Strike occurred which flowed into the shearing industry finishing up in Queensland with unionists being jailed in 1891.Industrial conflict finally came to rest in the Queensland shearing industry in 1894. The prevailing economic system collapsed reducing both investors and speculators to poverty. This environment of depression and industrial unrest was the background to the writing of the Australian Constitution.

Consequently, politics of the time was divided between trade union protectionism and free market capitalism. Even the Labor movement itself was similarly divided between protectionists and free traders. However, by 1894, NSW Labor adopted a unified protectionist philosophy. At the colonial level, NSW favored free trade whilst Victoria with a small manufacturing base, preferred protectionism. Consequently, therein lies the rationale for Section 92 of the Australian Constitution.


Inevitably, against such a background of industrial dislocation, deep economic depression, and political discontent, social justice reform as well as industrial reform became necessary. As the Constitution was written in troubled times, it is a protectionist document providing policy instruments to manage the undesirable features of unfettered capitalism. The Constitutional framework represents progressive thinking of the time necessary to counter growing interest in the Marx/ Engle's challenge to capitalism. The final version of the Constitution provided the framework for the mixed capitalist economic system that remained until structural reformers emerged post 1983. Indeed, the original Constitution fitted neatly with the economic theories of J.M. Keynes which were to emerge some three decades later.

The rise of Central Banking

The origin of Australian central banking began in 1911 with the establishment of the Commonwealth Bank as a trading and savings bank in competition with private sector banking. Between 1914 and 1918, the Commonwealth Bank raised loans to fund the First World War, and later, resettlement, training, and housing programs for returned servicemen. As well, the responsibility for banknote issue was transferred from Treasury to the Commonwealth Bank. Central banking responsibilities would begin in 1924 controlled by a Board whose membership would remain politically uncontaminated. Central bank duties were to "control" banking policy, assume the issue of printed notes, and provide accounts for the private banks which comprised part of their cash reserves, and settlement of interbank transaction.

The Commonwealth Bank Act and Banking Act of 1945 consolidated the central bank role of the Commonwealth Bank. Central bank powers conferred upon the Commonwealth Bank were to regulate activities of trading banks; control foreign reserves, protect depositor accounts; and control interest rates both offered and paid by the banks. In 1959, The Reserve Bank Act was passed which separated central bank roles from commercial activities.

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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