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”.
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 intent 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 our 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 are 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 (www.jppf.com.au).