Biography of a bank

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All over Australia slightly useless men breathed a collective sigh of relief that the photograph wasn’t of them.

That day, The Daily Telegraph had carried the front page headline: ‘Is this the most useless man in Australia?’

The man in the picture was Glenn Stevens, Governor of the Reserve Bank of Australia (RBA).

Governor Stevens was in the running for the top prize from the newspaper because of his role in raising interest rates – allegedly causing financial pain throughout the land and showing a lack of sensitivity towards the ubiquitous ‘working families’.

So why should an unelected Commonwealth official shoulder the blame for the interest rates? Shouldn’t that criticism fall on the Treasurer, or the policies of the Federal Government?

In part, the answer to that question lies in 1996, when the Howard Government came to power and then Treasurer Peter Costello issued a statement giving the RBA its independence to pursue a monetary policy set down by the government.

That statement set the wheels in motion for increased public scrutiny of the role of the RBA, and made Glenn Stevens, and his predecessor Ian Macfarlane, very accountable, very public, figures.

Independence, it seems, comes at a cost.

That independence of the RBA is just one of the landmark moments in its history, and part of the 1975-2000 era that economic historian Selwyn Cornish has been examining for the third volume of the RBA history that he has been commissioned to write for the bank.

“It’s an interesting period,” he says.

“Up to the early 1970s you have a fairly benign period of low unemployment and inflation, then rather suddenly you get inflation reaching a record of 17 per cent in 1974 and unemployment going over 10 per cent in 1983. It was a turbulent time.”

Even to the casual observer, Cornish is probably the right man to document the RBA’s history. He has been involved with ANU for over 40 years, has written extensively on economists and has an abiding interest in the establishment and development of Commonwealth institutions, including the RBA.

In his office in the H.W. Arndt Building, much of which has been surrendered to his extensive library leaving him only a small desk in the corner surrounded by bookcases, he thumbs through a huge pile of papers. They are documents, hundreds of pages, from a meeting of the RBA Board in April 1981.

“They’re not the whole set, just the parts I wanted copied,” he says.

It illustrates well the size of the task at hand for Cornish; a project that may have begun when former Governor Ian Macfarlane gave the inaugural Sir Leslie Melville Lecture at ANU in 2002.

“I came back from a Christmas break and there was a message to phone Ian Macfarlane. I thought ‘heavens… it’s the Governor of the Reserve Bank!’

“He asked me what I was doing on Wednesday and could I go up to Sydney and assist him with the preparation of the Melville Lecture? I had written extensively about Melville, the first economist employed by the central bank and the second Vice-Chancellor of ANU. So I spent the good part of a day talking to Macfarlane and got to know him through that. A year or two later he launched in Sydney Giblin’s Platoon, a book I wrote with William Coleman and Alf Hagger.

“Macfarlane then invited me to write this period of the bank’s history,” says Cornish.

The project began in early 2007 and was expected to be completed over three years. It quickly became apparent that this might not be the case.

“Ian Macfarlane asked if I wanted to go and live in Sydney and I said ‘definitely not!’ So he said that I could go to the bank regularly, check the records and then have them sent to the RBA’s branch in Canberra, where I was to have an office.

“Well, the first time I went to the bank the archivist told me ‘the records aren’t leaving Martin Place. So I work in Sydney for perhaps a week every month, indicate which records I want copied and get them sent to ANU. They do digitise them, but it takes so long to download…much easier just to get them photocopied,” he says.

The period that Cornish is looking at began traumatically. While his research may begin in 1975, the problems associated with that year began with the resources boom of the late 1960s and the associated transformation of Australia’s external economic position.

“1975 is coloured by the previous years, including,

of course, the first oil price shock in late 1973 and the wages blow-out in 1974. But the deterioration in the conduct of economic policy really began in the late 60s-early 70s, arising from the minerals expansion and the growth in the international movement of capital – there was a huge amount of money flowing into

the economy.”

The economy was also struggling to find its footing after the 1971 breakdown of the Bretton Woods system – the post-World War II agreement that regulated the exchange rates of national currencies.

It led to a period of experimentation by the monetary authorities, as Cornish explains.

“With the breakdown of Bretton Woods the hitherto nominal anchor of the economy was no longer there – the authorities had to develop a new approach to monetary policy.

“First it experimented with the monetarism philosophy associated with Milton Friedman. From 1976 there were monetary targets – that was meant to be the replacement. But for that to succeed you needed a floating exchange rate and a system of flexible interest rates – that wasn’t the case until the early 1980s, so the monetary targeting period was not very successful.

“The Fraser Government started with the idea of money supply targets, then they became ‘projections’, then they became ‘conditional projections’ and the process finally broke down with the deregulation of the financial system,” he says.

Towards the end of that period comes one of the crucial moments in the historical period that Cornish is looking at – the floating of the Australian dollar. Here, he says, the influence of the RBA played an important role.

“At the Campbell Committee RBA Governor (Harold) Knight argued against floating the exchange rate. Commentators at the time poured scorn on his testimony before the Committee. But a careful reading of what he said leads me to conclude that Knight’s testimony is one of the most remarkable documents in the history of Australian monetary policy. Whereas it is often said to have been obscure or opaque, it is perhaps more accurate to say that it was subtle and indeed very impressive.

“Governor Knight was quite a religious person and drew upon many biblical and ecclesiastical expressions and allusions. He summed up his – and the bank’s – position on the exchange rate by paraphrasing a famous quote from Saint Augustine along the lines of ‘God make me pure, but not yet’. I think that summarised beautifully what he was saying – in principle the bank wasn’t opposed to floating exchange rates, but the time was not appropriate to float the Australian dollar.

“By December 1983, though, the time was opportune and RBA Governor Bob Johnston advised the government to float the dollar. The rest, of course, is history.”

Cornish says that one of the things that has come through strongly in his research to date is that the RBA, even with ‘political’ appointees on the board, has a history of making economic decisions not on the basis of ideology or the latest fad in economic theory, but because the current policy is no longer working and a change has to be made.

“I’m not saying that theory and ideology aren’t important,” he says.

“But they’re generally not as important as the feeling that the existing framework isn’t working and has to be jettisoned. In late 1983 there were massive inflows of speculative capital and a semi-fixed exchange rate couldn’t handle the monetary expansion. Speculators were getting away with murder because they knew that sooner or later an adjustment would have to be made.

“Both Bob Hawke and Paul Keating had become convinced the dollar should be floated, but I think the bank played an important role in helping them to come to this conclusion. The decision to float the dollar was of crucial importance in the development of the cash rate system – the system around which monetary policy is now based.”

Another interesting area that Cornish has come across in his research is that, even before the report of the Campbell Committee, the RBA tended to be, in its advice to the governments of the day, more innovative – more adaptable to change – than it has sometimes been given credit for. One example of this was the bank advocating a tender system for the marketing of treasury notes and government bonds, instead of the RBA being obliged to buy those left unsold.

It was a stance that meant the RBA locked horns with government on more than one occasion.

“The bank was advocating that for some time, but the government of the day was pretty timid because it was worried that interest rates would go up.

“The Fraser Government was very much a farmer-dominated government; Fraser was a farmer, and they dominated the Monetary Policy Committee of Cabinet.

“So the RBA would advise the government that they needed to tighten policy and the committee would often delay in making a decision because of concern for the impact upon rural communities’,” he says. There was also excessive political sensitivity to the impact of higher interest rates on housing and mortgages.

Then there are the small surprising things that he has come across, such as the rare voice of dissent in RBA board meetings. Perhaps unsurprisingly, however, that voice of dissent was only ever from one person. “I’ve only got to the middle of the period that I’m looking at, but the only times I’ve found where there was dissent by a member of the board was when Bob Hawke was on it. On these occasions he insisted on having his dissent minuted.”

As part of his research Cornish has visited a number of other Central Banks, including the Reserve Bank of India, the Bank of England and the US Federal Reserve.

He was impressed with the respect with which the RBA is held by its counterparts in other countries and is convinced that the bank is a great Australian institution, conducting its work with tremendous professionalism by officers committed to serving the public interest.

“I’ve always been impressed with the Commonwealth as a political and economic construct and with Commonwealth institutions. I’ve worked briefly in Treasury and been at ANU for more than 40 years – which is a great Commonwealth institution. I like living in Canberra – that’s another Commonwealth institution and so is the RBA; it’s one of our great national institutions.

“Yet it’s a small institution. I was struck by its relative size given the nature of its responsibilities. It’s not bloated – it’s a fairly austere place, especially so far as things like its cafeteria and other staff amenities are concerned. You look at what the Bank of England has, or the Federal Reserve Board in Washington; the RBA is very modest in what it provides compared with other central banks.

“I think the RBA is very conscious of that, and it’s not at all extravagant in the way that it conducts itself.”

That, though, stands in contrast to the accusations levelled against ‘the most useless man in Australia’ by The Daily Telegraph.

“The article was a cowardly attack on an outstanding public official and, what’s more, was full of factual errors,” says Cornish.

“It asked why the RBA held its meeting with the House of Representatives Economics Committee at the Sheraton at a cost of something like $7,000 per hour. Well, that didn’t have anything to do with the RBA, it was the Parliament that chose to hold the meeting there and paid for it.”

The nature of the story about Governor Stevens, says Cornish, is a result of that 1996 Peter Costello-signed statement. And while he says the story was unfair and inaccurate, he thinks it’s right that the Governor, on behalf of the board, should be held publically accountable for the responsibilities that the bank has been assigned by the government.

“The RBA used to be a fairly closed institution, as all central banks were in earlier times. Some people might think it’s still a mysterious institution, but compared to what it was it’s much more open now to public scrutiny.

“There’s a big debate going on at the moment about whether the inflation target band is too narrow, but it’s often forgotten the policy – the inflation target – is set by the government, not the bank. And that’s how it should be – people elect the government, but not the board of the Reserve Bank,” he says.


From its earlier incarnation as the Commonwealth Bank and onto its 1959 transformation to the Reserve Bank of Australia, the RBA and ANU have been closely linked.

The last Governor of the Commonwealth Bank, and first Governor of the Reserve Bank of Australia was H.C. ‘Nugget’ Coombs, a man Selwyn Cornish describes as: “perhaps more than anyone else responsible for the creation of ANU.” Coombs would later go on to be Chancellor at ANU, having rejected an invitation to become its first Vice-Chancellor.

In fact, since the creation of the RBA, the University has maintained a presence on the board, as Cornish explains.

“ANU has had a good run. (Sir Leslie) Melville was on the original board of the RBA and continued until 1975, with a short absence when he worked for the World Bank for two years.

“He was replaced by ANU foundation Professor of Economics Trevor Swan, then he was succeeded by Bob Gregory. Gregory was replaced by Adrian Pagan and then Warwick McKibbin succeeded him when his term was completed.

“ANU has had a person on the RBA board virtually since 1959 when the first board was appointed,” he says.

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Updated:  25 March 2013/ Responsible Officer:  Director, SCAPA/ Page Contact:  Director, SCAPA