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Central banks are a different story altogether. They are considered ‘independent from politics’. Although not quite as independent as national constitutional courts, they sit apart from ordinary government bureaucracies. The Treasurer, no matter how much he may disagree, is bound either by law or practice not to interfere with the monetary policy decisions of the bank.

This has insulated them from accountability. Parliament does not control the Reserve Bank’s budget, as it does for the independent court system. Full disclosures of monetary policy dealings domestically and internationally are not accessible. The RBA’s exemption from Freedom of Information laws prevents the public from finding out the extent of its relationships with external actors. Like the Fed, no parliamentary committee truly oversees every aspect of its decision-making, meaning it is probably more secretive than the Australian Security Intelligence Service.

Comprehensive audits can reveal useful information about how a central bank is employing its discretionary powers. These audits have been said to impinge on independence, but many fail to consider the protections can be put in place to minimise this risk. Not all documents discovered during an audit need to be made public. Some can be viewed privately by the inspector-general in charge of accountability. Appropriate safeguards, such as time lags between the time of a monetary policy decision and an audit of the decision, can be put in place.

Politicians already have many ways to interfere in monetary policy – using the bully pulpit of parliamentary committees is one of them – and it is unlikely that expanding the scope of audits would significantly affect central bank independence.

Meet Peter at the Mises Seminar (mises.org.au). Next podcast features Michael Conaghan and I rebutting the arguments of pro-war “libertarians”.

The Reserve Bank of Australia has been in the news recently, thanks to a corruption scandal splashed across the front pages of newspapers throughout the country. According to reports, two currency firms overseen by the Reserve Bank funnelled bribes to government officials in Indonesia, Malaysia and Vietnam, to win banknote deals. Securency and Note Printing Australia are partly and wholly owned (respectively) by the RBA, and many prominent political figures sat on the boards of the two companies.

This scandal, however, is just the tip of the iceberg. Other aspects of the RBA are equally shady, but are rarely exposed to public scrutiny. A new book by investor Chris Leithner, The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australians’ Liberty and Prosperity, documents in detail the nefarious schemes of Australia’s central bank.

Leithner is an adherent of the Austrian School of Economics, which argues that central banks are behind the boom-bust cycle that characterises modern economies. They are, in other words, the culprit responsible for recessions and depressions. By controlling the overnight cash rate (the rate at which banks borrow from the central bank), the Reserve Bank is able to control the money supply and thereby influence interest rates. This sets in motion a process that influences the rate of interest on housing loans, deposits and business loans.

When interest rates are kept artificially low, distortions in the structure of production, excessive borrowing and speculation are the result. The central bank’s loose money policies mislead investors into starting projects that appear profitable, but in hindsight are not. 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.

This, in a nutshell, is the Austrian theory of the business cycle. According to this view, economic downturns are the price paid for prior (artificial) credit expansion.

We find evidence of this in the United States, when the Chairman of the Federal Reserve – Alan Greenspan – kept the federal funds rate at an absurdly low 1% from June 2003 till June 2004. Many attribute the resulting housing bubble to Greenspan’s suppression of rates.

In Australia, Leithner shows that the RBA also started an artificial boom. Leithner shows that from 1991-2007, the money supply rose rapidly. By Leithner’s reckoning, inflation (the M1 measure) increased by 404%, at an annualised compound rate of 10.2%. As in the US, much of the credit created by the Reserve Bank was pumped into the housing market, creating an asset price bubble. Stock prices were inflated.

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 remain overvalued and have not dropped to more realistic levels.

The role played by central banks in fostering monetary instability leads Leithner to question whether we need a central bank at all. It’s not a crazy question! For much of Australia’s history, there was no central bank. Private banks issued currencies and there was little government regulation of the banking sector.

In an environment of global financial instability that many argue is caused by central banking, it is worth asking serious questions about these institutions. Most central banks are highly secretive about their activities. For instance, the Reserve Bank did not even publish minutes of board meetings until December 2007.

There is a fundamental democratic principle involved here. Why should central banks, which are staffed by unelected bureaucrats, wield such a high level of discretionary power? Shouldn’t there be more democratic oversight of these money mandarins who have so much influence over our living standards?

We have seen what happens when central banks are left unchecked. In Zimbabwe, for example, hyperinflation has crippled the purchasing power of the currency. Prices in the African country rise at an extremely rapid pace, over 50% per month. Nobody is suggesting that a catastrophe of that nature is likely to befall Australia. But Zimbabwe is a reminder of the awesome power that central bankers wield, and should prompt us to improve accountability and search for less discretionary ways to manage money and banking.

Originally published in Indian Link (September 2011).

Listen to my interview of Andrew Dahdal, a speaker at the Mises Seminar.

Next speaker I’m interviewing is Dr. Andrew Dahdal, who is speaking about why fiat paper money is unconstitutional. Did you know the founders of Australia were against government paper money? That’s why they inserted section 115 into our Constitution: ‘A State shall not coin money, nor make anything but gold and silver coin a legal tender in payment of debts’. Stay tuned for the interview, and feel free to suggest questions I should ask Dahdal.