08 August 2010By Ellen Brown
Virg Bernero, the mayor of Lansing, Michigan, just won
the Democratic nomination for governor of his state,
making a state-owned Bank of Michigan a real
possibility. Bernero is one of at least a dozen
candidates promoting that solution to the states’
economic woes. It is an innovative idea, with little
precedent in the United States. North Dakota,
currently the only state owning its own bank, also
happens to be the only state sporting a budget
surplus, and it has the lowest unemployment rate in
the country; but skeptics can write these achievements
off to coincidence. More data is needed, and
fortunately other precedents are available from other
countries.
One of the most dramatic is the Commonwealth Bank of
Australia, which operated successfully as a
government-owned bank for most of the 20th
century, until it was privatized in the 1990s. The
Commonwealth Bank’s creative founders demonstrated
that a government-backed bank can make loans without
capital. Denison Miller, the Bank’s first Governor,
was fond of saying that the Bank did not need capital
because “it is backed by the entire wealth and credit
of the whole of Australia.”
The Commonwealth Bank’s accomplishments were
particularly remarkable considering that for its first
eight years, from 1912 to 1920, it did not have the
power to issue the national currency --unlike the U.S.
Federal Reserve, which acquired that power in 1913.
The Commonwealth Bank was thus in the same position as
a state of the United States or a member country of
the European Union (think Greece), which also lack the
power to issue their own currencies. Operating without
that power and without startup capital, the
Commonwealth Bank funded both massive infrastructure
projects and the country’s participation in World War
I. According to David Kidd, writing in a 2001 article
titled “How Money Is Created in Australia”:
“Australia’s own government-established Commonwealth
Bank achieved some impressive successes while it was
‘the peoples’ bank’, before being crippled by later
government decisions and eventually sold. At a time
when private banks were demanding 6% interest for
loans, the Commonwealth Bank financed Australia’s
first world war effort from 1914 to 1919 with a loan
of $700,000,000 at an interest rate of a fraction of
1%, thus saving Australians some $12 million in bank
charges. In 1916 it made funds available in London to
purchase 15 cargo steamers to support Australia’s
growing export trade. Until 1924 the benefits
conferred upon the people of Australia by their Bank
flowed steadily on. It financed jam and fruit pools to
the extent of $3 million, it found $8 million for
Australian homes, while to local government bodies,
for construction of roads, tramways, harbours,
gasworks, electric power plants, etc., it lent $18.72
million. It paid $6.194 million to the Commonwealth
Government between December, 1920 and June, 1923 - the
profits of its Note Issue Department - while by 1924
it had made on its other business a profit of $9
million, available for redemption of debt. The bank’s
independently-minded Governor, Sir Denison Miller,
used the bank’s credit power after the First World War
to save Australians from the depression conditions
being imposed in other countries. . . . By 1931
amalgamations with other banks made the Commonwealth
Bank the largest savings institution in Australia,
capturing 60% of the nation’s savings.”
Harnessing the Secret Power of Banking
for the Public Good
The Commonwealth Bank was able to achieve so much with
so little because its first Governor, Denison Miller,
and its first and most ardent proponent, King
O’Malley, had both been bankers themselves and knew
the secret of banking: that banks create the “money”
they lend simply by writing accounting entries into
the deposit accounts of borrowers.
This banking secret was confirmed by a number of early
banking insiders. In a 1998 paper titled
“Manufacturing Money,” Australian economist Mike
Mansfield quoted the Rt. Hon. Reginald McKenna, former
Chancellor of the Exchequer, who told shareholders of
the Midland Bank on January 25, 1924, “I am afraid the
ordinary citizen will not like to be told that the
banks can, and do, create and destroy money. The
amount of money in existence varies only with the
action of the banks in increasing or decreasing
deposits and bank purchases. We know how this is
effected. Every loan, overdraft or bank purchase
creates a deposit, and every repayment of a loan,
overdraft or bank sale destroys a deposit.”
Dr. Coombs, former Governor of the Reserve Bank of
Australia, said in an address at Queensland University
on September 15, 1954, “[W]hen 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.”
Ralph Hawtrey, Assistant Under Secretary to the
British Treasury in the 1930s, wrote in Trade
Depression and the Way Out, “When a bank lends, it
creates money out of nothing.” In his wrote in Trade
Depression and the Way Out, “When expanded on this
statement, writing, “When a bank lends, it creates
credit. Against the advance which it enters amongst
its assets, there is a deposit entered in its
liabilities. But other lenders have not the
mystical power of creating the means of payment out of
nothing. What they lend must be money that they have
acquired through their economic activities.”
Banks can do what no one else can: “create the means
of payment out of nothing.” The Commonwealth Bank’s
far-sighted founders harnessed this guarded banking
secret to serve the public interest.
The Bank Collapse of 1893 Spawns a New
Public Banking Model
The Commonwealth Bank was founded under conditions
like those prevailing today: the country had just
suffered a massive banking collapse. In the 1890s,
however, there was no FDIC insurance, no social
security, no unemployment insurance to soften the
blow. People who thought they were well off suddenly
found they had nothing. They could not withdraw their
funds, write checks on their accounts, or sell their
products or their homes, since there was no money with
which to buy them. Desperate people were leaping from
bridges or throwing themselves in front of trains.
Something had to be done.
The response of the Labor government was to pass a
bill in 1911 which included a provision for a
publicly-owned bank that would be backed by the assets
of the government. In a rare move for the time, the
bank was to have both savings and general bank
business. It was also the first bank in Australia to
receive a federal government guarantee.
Jack Lang was Australia’s Treasurer in the Labor
government of 1920-21 and Premier of New South Wales
during the Great Depression. A controversial figure,
he was relieved of his duties after he repudiated
loans owed to the London bankers. In The Great
Bust: The Depression of the Thirties (McNamara’s
Books, Katoomba, 1962), Lang described the
Commonwealth Bank’s triumphs and tribulations in
revealing detail. He wrote:
“The Labor Party decided that a National Bank, backed
with the assets of the Government, would not fail in
times of financial stress. It also realised that such
a bank would be a guarantee that money would be found
for home building and other needs. After the collapse
of the building societies, there was a great scarcity
of money for such purposes.
“. . . Chief advocate of the cause of a Commonwealth
Bank was King O’Malley, a colorful Canadian-American .
. . Before coming to Australia, he had worked in a
small New York bank, owned by an uncle. . . . He had
been much impressed by the way that his uncle had
created credit. A bank could create the credit, and
at the same time manufacture the debit to balance it.
That was the big discovery of O’Malley’s banking
career. A born showman, he itched to try it out on
a grand scale. He started his political career in
South Australia by advocating a State Commercial Bank.
In 1901 he went into the first Federal Parliament as a
one-man pressure group to establish a Commonwealth
Bank, and joined the Labor Party for that purpose.”
King O’Malley insisted that the Commonwealth Bank had
to control the issue of its own notes, but he lost on
that point – until 1920, when the Bank did take over
the issuance of the national currency, just as the
U.S. Federal Reserve was authorized to do in 1913.
That was the beginning of the Commonwealth Bank’s
central bank powers. But even before it had that
power, the Bank was able to fund infrastructure and
defense on a massive scale, and it did this without
startup capital. These achievements were chiefly due
to the insights and boldness of the Bank’s first
Governor, Denison Miller.
The other bankers, fearing competition, had thought
that by getting one of their own men in as the bank’s
governor, they could keep it in line. But they had not
reckoned on their independent appointee, who saw the
opportunity posed by a government-backed bank and set
out to make it the finest institution the country had
ever known. As Lang tells the story:
“The first test came when a decision was required
regarding the amount of capital needed to start a bank
of that kind. Under the Act, the Commonwealth had the
right to sell and issue debentures totalling £1
million. Some even thought that amount of capital
would be insufficient, having in mind what had
happened in 1893. . . .
“When Denison Miller heard of it, his reply was that
no capital was needed.”
Miller was wary of going to the politicians for money.
He could get by without capital. Like King O’Malley,
he knew how banking worked. (This was, of course,
before the modern-day capital requirements imposed
from abroad by the central banker’s bank, the Bank for
International Settlements.) Lang continued:
“Miller was the only employee. He found a small office
. . . and asked the Treasury for an advance of
£10,000. That was probably the first and last time
that the Commonwealth lent the Bank any money. From
then on, it was all in the reverse direction.
“. . . By January, 1913 [Miller] had completed
arrangements to open a bank in each State of the
Commonwealth, and also an agency in London. . . . [O]n
January 20th, 1913 he made a speech declaring the new
Commonwealth Bank open for business. He said:
“‘This bank is being started without capital, as none
is required at the present time, but it is backed by
the entire wealth and credit of the whole of
Australia.’
“In those few simple words was the charter of the
Bank, and the creed of Denison Miller, which he never
tired of reciting. He promised to provide facilities
to expand the natural resources of the country, and it
would at all times be a people's bank. ‘There is
little doubt that in time it will be classed as one of
the great banks of the world,’ he added prophetically.
“. . . Slowly it began to dawn on the private banks
that they may have harbored a viper. They had been so
intent on the risks of having to contend with bank
socialisation that they didn’t realise they had much
more to fear from competition by an orthodox banker,
with the resources of the country behind him.
“. . . One of the first demonstrations of his vigor
came when the Melbourne Board of Works went on the
market for money to redeem old loans, and also to
raise new money. Up to that time, apart from Treasury
Bills and advances by their own Savings Banks,
Governments had depended on overseas loans from
London. . . . In addition to stiff underwriting
charges, they found that the best they could expect
would be £1 million at 4 per cent., at 97 1/2 net.
“They then decided to approach Denison Miller, who had
promised to provide special terms for such bodies. He
immediately offered to lend them £3 millions at 95 on
which the interest rate would be 4 per cent. They
immediately clinched the deal. Asked where his very
juvenile bank had raised all that money, Miller
replied, ‘On the credit of the nation. It is
unlimited.’”
Another major test came in 1914 with the First World
War:
“The first reaction was the risk that people might
start rushing to the banks to withdraw their money.
The banks realised that they were still vulnerable if
that happened. They were still afraid of another Black
Friday.
“There was a hurried meeting of the principal bankers.
Some reported that there were signs that a run was
already starting. Denison Miller then said that the
Commonwealth Bank on behalf of the Commonwealth would
support any bank in difficulties. . . . That was the
end of the panic. But it put Miller on the box seat.
Now, for the first time, the Commonwealth Bank was
taking the lead. It was giving, not taking, orders. .
. .
“Denison Miller . . . was virtually in control of the
financing of the war. The Government didn’t know how
it was going to be achieved. Miller did.”
And so this interesting story continues. Miller died
in 1923, and in 1924 the bankers got back in control,
throttling the activities of the Commonwealth Bank and
preventing it from saving Australians from the ravages
of the 1930s Depression. In 1931, the bank board came
into conflict with the Labor government of James
Scullin. The Bank’s chairman refused to expand credit
in response to the Great Depression unless the
government cut pensions, which Scullin refused to do.
Conflict surrounding this issue led to the fall of the
government, and to demands from Labor for reform of
the bank and more direct government control over
monetary policy.
The Commonwealth Bank received almost all of the
powers of a central bank in emergency legislation
passed during World War II, and at the end of the war
it used this power to begin a dramatic expansion of
the economy. In just five years, it opened hundreds of
branches throughout Australia. In 1958 and 1959, the
government split the bank, giving the central bank
function to the Reserve Bank of Australia, with the
Commonwealth Banking Corporation retaining its
commercial banking functions. Both banks, however,
remained publicly-owned.
Eventually, the Commonwealth Bank had branches in
every town and suburb; and in the bush, it had an
agency in every post office or country store. As the
largest bank in the country, it set the rates and set
policy, which the others had to follow for fear of
losing customers. The Commonwealth Bank was widely
perceived to be an insurance policy against abuse by
private banks, serving to ensure that everyone had
access to equitable banking. It functioned as a wholly
owned state bank until the 1990s, when it was
privatized. Its focus then changed to maximization of
profits, with steady and massive branch and agency
closures, staff layoffs, and reduced access to
Automated Teller Machines and to cash from supermarket
checkouts. It has now become just another part of the
banking cartel, but proponents say it was once the
lifeblood of the country.
Today there is renewed interest in reviving a
publicly-owned bank in Australia on the Commonwealth
Bank model. The United States and other countries
would do well to consider that option too. Any
proposed legislation should contain careful checks for
accountability. The Commonwealth Bank served Australia
brilliantly well for its first 11 years under the
stewardship of one honest man, Denison Miller. When he
passed away in 1923, the bank was delivered into the
hands of a board of businessmen more interested in
serving their own interests than the nation's.
Legislation would need to be drafted that prevented
that from happening again.
Special thanks to Peter Myers for reproducing major
portions of Jack Lang’s book in his weekly newsletter.
Ellen Brown developed her research skills as an
attorney practicing civil litigation in Los Angeles.
In Web of Debt, her latest of eleven books, she turns
those skills to an analysis of the Federal Reserve and
“the money trust.” She shows how this private cartel
has usurped the power to create money from the people
themselves, and how we the people can get it back. Her
websites are
www.webofdebt.com,
www.ellenbrown.com,
and
www.public-banking.com.
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