Let’s open up the books at the Reserve Bank

Henry Ford, the American automobile manufacturer, once said that “It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning”, writes Sukrit Sabhlok.

Indeed, if there’s one thing central bankers have been successful at, it’s using obfuscation and jargon so the public finds it difficult to understand what exactly it is they do.

Even when experts try and figure out what central bankers do, a range of legal barriers prevent a complete accounting of their activities. When former Congressman Ron Paul tried to audit the US Federal Reserve System a few years ago, for example, he faced opposition from a range of economists and politicians keen on preserving the Fed’s secrecy.

In Australia, the opaqueness of the Reserve Bank’s discretion doesn’t seem to trouble many people. But it should, because the RBA wields a significant power that influences the level of prices in the economy and consequently affects the hip pocket. The inflation it creates hurts the poor – and if more people knew the RBA was the culprit behind rising prices, and that much of the erosion in purchasing power we have seen over the past 100 years was unnecessary, there is little doubt that there would be protests on the streets.

The RBA’s aversion to scrutiny can be seen in the way that it shies away from the media spotlight, preferring instead to stage-manage the appearances of its officials in carefully scripted testimonies before parliamentary committees. The agency also enjoys significant exemptions from freedom of information legislation, and furthermore, doesn’t provide reasons for its decisions in a way that allows the public hold individual board members accountable for their views (one can contrast this to the Bank of Japan where individual board members’ votes are recorded).

Perhaps most troubling is the Reserve Bank’s budgetary processes, which are ‘off-the-books’ in the sense that the Bank just prints the money it needs to carry out its functions without needing to seek parliamentary authorisation for its spending. Although legislation does specify that the RBA is to return profits to the Treasury, the process is removed from other departments or agencies of the state.

How does the RBA justify its lack of accountability? The organization’s defenders have typically pointed to the doctrine of ‘central bank independence’ which rose to popularity in the 1990s. The doctrine aims to remove political considerations from central banking by insulating the technocrats at the RBA from transparency so they can carry out their work in the ‘best interests of the community’.

But a degree of latitude from intervention by politicians, while a noble objective, has become a code-word for secrecy. The need for free and frank discussion outside of the democratic realm is cited by central bankers as a reason for not releasing transcripts of the open market committee or for keeping hidden agreements with foreign central banks and governments.

This should be viewed as the self-serving tripe it is. The High Court as the nation’s highest court exercises equally important responsibilities yet its judges provide detailed reasons for their decisions so the public can hold them accountable for their views, and also has a budget authorized through the parliamentary process. It is doubtful that the RBA, as the custodian of the nation’s money supply, is so special that its individual board members should not have to justify every cash rate decision made.

In practice, the much vaunted ‘independence’ of the RBA is greatly exaggerated, so the doctrine of central bank independence fails to persuade in any case. Appointments to the board, which are made by the Treasurer, have been politicised, undermining its so-called independence. It makes sense that Treasurers would take into account more than just merit when making appointments: they are likely to select someone that already agrees with Cabinet’s own policy preferences. A blatant example of this was the appointment of Robert Gerard – a donor to the Liberal Party who had contributed $1 million to its coffers and was said to be a supporter of low interest rates – by Peter Costello.

The board itself is a coalition of vested interests populated with representatives from lobby groups and commercial entities who are heroically asked to set aside their sectional interests and prioritise the ‘public good’. The current board comprises powerbrokers with links to Walmart, Origin Energy and other major firms. Even the only academic member of the board, Professor John Edwards, was formerly employed by HSBC Bank and was an advisor to Prime Minister Paul Keating – a detail that would’ve been looked upon favourably by the Labor government that appointed him.

Consider also, that the RBA seems to accommodate its political masters through its reluctance to raise interest rates before elections. Ian McFarlane himself admitted in Australia’s Money Mandarins that "[the 2001 election] did have some small weight in our decision. If there was a really strong case to do something, we would always do it regardless of the election campaign. But it would have to be a pretty strong case". Since it gained ‘independence’, the Bank has only raised rates once before an election, and that was during the 2007 campaign.

It’s little wonder, then, that between 1991 and 2007 Australia was a high inflation country. Investor Chris Leithner points out that monetary aggregates rose at a rapid rate: M1 increased 404%, at an annualised compound rate of 10.2%. Naturally, this has significantly devalued the currency in Australians’ pockets and reduced standards of living – and all the while the Bank has continued to keep a lid on information that could be crucial in evaluating its performance.

Although it has been argued by central bankers that their role requires secrecy, they are overstating their case. To the contrary, when markets get more information, this can be expected to reduce uncertainty, bolster confidence and improve economic outcomes. Economic historian Robert Higgs, for instance, has shown how lack of investor knowledge about the government’s expected policy actions delayed recovery during the Great Depression. Similarly, studies have shown that greater transparency is often associated with less inflation variability.

A monetary system consistent with the rule of law – where accountability and transparency is the norm rather than the exception – demands opening up the books at the RBA. The public deserves to know.  

Sukrit Sabhlok is a Masters candidate at Monash University and editor of the Journal of Peace, Prosperity and Freedom

Review Essay: The Evil Princes of Martin Place.

Picture Sukrit Sabhlok Sukrit Sabhlok reviews Chris Leithner’s new book, The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australians’ Liberty and Prosperity

It might have a long title, but is also extremely lengthy in number of pages. At 654 pages, a casual reader interested in understanding the recent financial crisis might wonder whether it’s worth buying Leithner’s extremely hefty work. My answer is a resounding ‘yes’. Every Australian should read this book to understand how the government’s involvement in money and banking has diminished their living standards.

Leithner’s goal is simple: to challenge conventional wisdom in the field of monetary economics. Along the way, he also demolishes a variety of other fallacies surrounding the State and its interventions. Harvard-educated academics – the same people who did not foresee the crisis – have blamed the crisis on capitalism and greed, but Leithner is here to defend the free-market perspective against the Keynesian onslaught.

According to Leithner, government intervention, not market failure, is the underlying cause of recessions and depressions. Government’s interventions are manifested through such measures as fractional reserve banking (FRB), legal tender laws, and central banking. Leithner argues that these forms of meddling in monetary affairs create economic turmoil. Though few people discuss the merits or otherwise of FRB and legal tender laws, central banking is already prominent in mainstream debates.

Central banks are a relatively recent phenomenon. For many years, Australians prospered without a central bank in an environment where private banks issued paper currencies. The pre-1901 era in Australia was a time of free banking, i.e. a situation where government gave no special privileges to banks. ‘Australian banking was relatively free for almost a century from the establishment of the first banks until well into the twentieth,’ explains Kevin Dowd in Laissez Faire Banking, ‘and fully fledged central banking arrived only with the establishment of the Reserve Bank of Australia at the comparatively late date of 1959’.

Nowadays, central bankers are highly praised and government intervention is taken for granted. Leithner questions this naïve faith:

In Australia, economists, investors and journalists babble endlessly about the level at which the Reserve Bank should “set” the “official interest rate”…Alas, almost nobody bothers to ask why it should be set, or whether it actually can be fixed…[F]or reasons rarely discussed and never justified, virtually nobody baulks at the notion that a short-term money market rate of interest must be “set” by a committee of price-fixers and central planners in Martin Place, Sydney.

How does monetary central planning bring about recessions? To answer this question Leithner turns to Austrian Business Cycle Theory (ABCT). ABCT suggests that economic downturns are the price paid for prior (artificial) credit expansion. When central banks lower the market rate of interest below the natural rate this leads to distortions in the structure of production, excessive borrowing and speculation. The central bank’s loose money policy misleads investors into starting projects that appear profitable, but in hindsight are not.

In The Evil Princes of Martin Place, Leithner presents data supporting the ABCT. According to Leithner, the Reserve Bank started the artificial boom that led to the ‘genuine bust’. It began the boom by pursuing a policy of high inflation. Leithner shows that from 1991-2007, though consumer prices remained deceptively low, the money supply rose rapidly. By Leithner’s reckoning, inflation (the M1 measure) increased by 404% between 1991 and 2007, at an annualised compound rate of 10.2%. Much of the credit created by the Reserve Bank was pumped into the housing market, creating an asset price bubble. Stock prices were inflated. The crash comes because investors foolishly think that the boom will last, and leverage themselves too highly as they were not prudent in their accumulation of debt. Leithner writes:

The trouble with the gilded boom of the Keating-Howard era is that it has sowed the seeds of a genuine bust. Alas, misperceptions of “the fundamentals”, together with the moral hazards these confusions spawned, prompted many Australians to conclude by 2007 that “Goldilocks” conditions are normal rather than exceptional, and therefore that they would be permanent rather than transient. Moral hazard and the apparent success of ever-riskier investment strategies obscured the less-than-pleasant memories of the 1970s, early and late 1980s, and early 1990s. They also encouraged Australians to think that they could always get a cheap loan, their rulers were omniscient and omnipotent and – in the unlikely event that anything untoward ever occurred – they would ride quickly and effectively to the rescue.

For Leithner, however, the bust has not yet arrived – hence the reason why the Australian recession was not as severe as its American counterpart. Australian house prices are still overvalued.

Leithner has covered a variety of fields and excelled in all. Lawyers will enjoy the legal analysis of Roman law and more recent judgements surrounding banking. Economic historians will appreciate the careful analysis of financial crises beginning with the panic of 1907. Political scientists will glean insights from the anti-democracy chapter, where he points out its many shortcomings. Philosophers will learn something about the ethics of monetary policy.

Overall, The Evil Princes of Martin Place is an outstanding study of money and banking; a libertarian blockbuster filled with insights into the shady dealings of politicians and bankers. I would highly recommend it to anyone interested in understanding the causes and consequences of the GFC.

Sukrit Sabhlok is a law graduate currently completing honours in political science at the University of Melbourne. He is a director of Liberty Australia (la.org.au).

Why illegal drugs should be legalized

The war on drugs is an enemy of civil liberties, writes Sukrit Sabhlok.

John Stuart Mill’s classic work, On Liberty, examines “the nature and limits of the power which can be legitimately exercised by society over the individual” and concludes: “The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.”
In a democracy, however, the tyranny of the majority often tramples individual freedoms. If 51% of the people agree on a proposed measure that is oppressive towards some minority, in the absence of any constitutional limitation, that measure will become the law of the land.

And so it is with the ‘War on Drugs’. If we leave aside the legal drugs, only a minority of people are attracted to mind-altering substances. Of those aged 14 and over, 39.1% have tried marijuana, 8.8% have tried amphetamines, 4.3% have tried cocaine and 2.2% have tried heroin. These figures, from the National Drug Strategy Household Survey, help explain why prohibition persists: there are few votes in advocating rights for “unfashionable” minorities. Although 46.4% of Australians have tried an illicit drug at some point in their life, there seems to be an element of cognitive dissonance among drug users, with many supporting a policy of prohibition. 
The War on Drugs should be opposed on two grounds. 
First, the statutes enforcing prohibition violate several principles that guide our criminal law; for instance, that there must be a victim, and that the accused are innocent until proven guilty. 
Second, to the best of my knowledge, prohibition has not succeeded in any nation which it has been tried. In Australia, in spite of a total sum of $13 billion being spent between 1976 and 2000, studies continue to show that drugs are easily available, increasing in purity and the number of overdose deaths has increased, not decreased.
If the drug warriors think that jail time is enough to “win” the War on Drugs, they need to think twice. Capital punishment for mere possession is probably the only way to significantly reduce drug usage. But even Singapore, which uses capital punishment to deter drug offences, has failed to end either the supply or demand of drugs. In any case, is a society where people are put to death for using drugs the kind of society we want to live in?
The misnamed ‘War on Drugs’ is in reality a war on our families. It is nonsensical to speak of waging a war against marijuana or heroin when it is the users of these drugs that are marginalised by political leaders and humiliated by police violating their civil liberties.
For those who value the rule of law and limited government, the War on Drugs is an enemy of civil liberties. Police and courts are empowered to reverse the burden of proof, so the accused are no longer innocent until proven guilty. In addition, drug prohibition diverts scarce economic resources away from taxpayers. It is time we tried something different.
Sukrit is an Arts/Law student at the University of Melbourne and a director of Liberty Australia.