Labor and the banks go way, way back
Bill Shorten’s proposal to have a Royal Commission into the banking system is not just good politics. It also taps into a long Labor tradition: banking Royal Commissions – and banking policy generally – occupy a special corner in Labor’s history.
We need to see terms of reference for the proposed Royal Commission. The emphasis so far, though, has been on illegal and unethical banking behaviour in the absence of adequate regulation, together leading to damage to consumers of financial advice, loans and life insurance. (The Australian Bankers’ Association believes a Royal Commission was unnecessary though it conceded that ‘in the past …. banks have not always lived up to their own standards, let alone those of their customers’.)
The Royal Commission’s brief should range widely to look at the banks’ market power as this is intimately linked to the quality of their service to their clientele. Wobbly banks in Western economies have sometimes been seen as ‘too big to fail’. In other words, their collapse would bring down the economy. Banks can also be ‘too powerful to tangle with’, especially if their power is concentrated and they operate as cartels. The fewer banks there are the easier it is for them to work together and resist government regulatory power. Having few banks, working as a cartel, also limits consumer choice. Consumers escaping one shark in a suit may be gobbled up by another.
Evan Jones, writing in Fairfax, gave a history of partial reviews of Australian banking. He saw the most recent review, Murray 2014, as emphasising capital adequacy requirements (a hedge against failure) but avoiding other symptoms of a ‘seriously broken’ system.
The de facto cartel competes aggressively in misleading advertising, but declines to compete where it matters – competence and integrity in customer relations. In particular, the typical loan facilities for small business and farmers are not fit for purpose. Who cares? The strategy: take security on customer and guarantor assets and default at will … The finance sector is now a societal monolith, and with parasitical tendencies.
The Murray Report had tried to corral the issues when it concluded that
the focus of financial system policy should be primarily on the degree of efficiency, resilience and fairness the system achieves in facilitating economic activity, rather than on its size or direct contribution (such as through wages and profits) to the economy.
In reality, these attributes and effects run in all directions; Murray’s distinction is unsustainable. The ‘efficiency’ of the cartel delivers profits for the financial sector but may also hamper ‘economic activity’ by reducing competition and ‘fairness’ by denying service to viable customers or giving it to unviable ones.
The clearest ‘contribution … to the economy’ is within the sector itself. Jones points out that the finance sector’s share of total business income – banks dominate the sector but it also includes building societies and credit unions – grew from three per cent in 1980-81 to 17.1 per cent last year. APRA figures show the ‘big four’ banks, ANZ, the Commonwealth, the National Australia Bank and Westpac, achieved profits in the year ended December 2014 of $30 billion out of total banking profits of $34 billion.
According to the International Monetary Fund in 2012, Australia’s banking system is the most concentrated in the world. Our big four banks have a bigger share of banking business (around 80 per cent of total banking assets, with residential mortgages the largest component) than the biggest four banks in any other economy. This sounds like ‘too big to fail’ but it also raises the questions: how did this come about and what has Bill Shorten’s party done about it previously?
The power of the banks has been a continuous theme for Labor. When the Fisher Government founded the Commonwealth Bank in 1911 as ‘the people’s bank’ it disappointed the radical Labor member, Frank Anstey, who complained the new bank ‘possesses no more power than any ordinary trading bank’.
Thus [Anstey said] the Labor Government ignored the felonious bank history of all countries – “one of the frauds by which Capitalism bleeds the people”… It gave a Commonwealth Bank, but it left it stripped of those prerogatives specified in the [Labor] platform; prerogatives that would have made it the supreme banking power in the Nation, that would have made all other banks (while they existed) subject to its will.
The Great Depression of 1929-33 led to demands for banking reform, following what was seen as the banks’ contribution to the crisis – essentially, excessive lending during the 1920s followed by restrictive policies after the crash of 1929 – which harmed many ordinary Australians. While the product emphasis may have changed – more unwise loans in the 1920s, more dodgy financial advice today – the common and ageless threads over the long run of banking history are, first, shoddy service to customers and, secondly, profits.
In 1937, the then former Labor member of federal parliament, Ben Chifley, used his minority report from the Royal Commission on the Monetary and Banking Systems to propose fundamental change. His fresh memories of the then recent depression added to his recollections of the impact of the 1890s depression, when thirteen banks closed in two months in 1893.
Banking differs from any other form of business [Chifley said] because any action – good or bad – by a banking system affects almost every phase of national life … In my opinion the best service to the community can be given only by a banking system from which the profit motive is absent, and, thus, in practice only by a system entirely under national control.
The Royal Commission’s majority proposed far less sweeping reforms than Chifley preferred but even these were not followed up, due to opposition from the banks and then the onset of war. After World War II, the Curtin and Chifley Governments turned their attention to banking reform, largely in response to memories of earlier depressions and fears that a new one would occur.
During the war, banking had been controlled under defence regulations. Labor’s 1945 banking legislation attempted to permanently regulate the trading banks through licensing, lodging of a part of bank deposits with the Commonwealth Bank and control by the Commonwealth of advances policy and interest rates. The legislation also expanded the Commonwealth’s role into that of a central bank, though it was to be subject to the government in any policy dispute. These reforms were along the lines of the wartime system and the majority recommendations of the 1930s Royal Commission.
When the High Court knocked out the 1945 legislation, Chifley responded on 16 August 1947.
Cabinet today authorized the Attorney-General (Dr. Evatt) and myself to prepare legislation for submission to the Federal Parliamentary Labor Party for the Nationalisation of banking, other than State banks, with proper protection for shareholders, depositors, borrowers and staff of private banks.
What followed over the next two years has been described as the most torrid political battle in Australia since the conscription referenda of 1916-17. Chifley put the case for nationalisation:
We have only to cast our minds back to other days, when tens of thousands of people were deprived of the necessities of life. Even as a small child, I can remember the depression of the nineties, and the farmers near where I lived who were desolated and grief stricken at the closing of the banks …
We move on then to the 1930s, and there is not one man, be he an economist or not, who will now defend the economic policy which was applied in 1930. We have seen people crowded at factory gates in their thousands trying to get one job; we have seen people at police stations to collect the dole of 5s. 9d. or 8s. 6d. a week.
We do not say that the depression could have been avoided by monetary action. What we do know is that the misery and suffering of hundreds and thousands of men, women and children in this country could have been mitigated to a large degree had proper monetary action been taken …
We do not want the conditions of the depression to recur … [W]e want to ensure that the government of the country shall be in a position to apply through its agent, the Commonwealth Bank, the financial and monetary policy that will prevent, as far as monetary policy can prevent, the sort of thing that happened in the days of the depression.
Trade unions strongly supported nationalisation. On the other side, a vigorous coalition of bank officers and their supporters allied with the Liberal and Country parties and much of the metropolitan press to attack Labor. The argument against bank nationalisation turned into a wide-ranging attack on what Opposition Leader Menzies called Labor’s desire ‘to put the lives and affairs of ordinary citizens into bondage’. Dramatised advertising starring ‘Bob Freeland’ and ‘John Henry Austral’ put the anti-Labor case as the government was accused of socialism, communism, nazism and fascism – and sometimes all of these at once.
Ultimately, the High Court and the Privy Council disallowed the 1947 banking legislation. The attempt to nationalise the banks, along with discontent over petrol rationing, governmental restrictions persisting too long after the war, and other dissatisfaction, led to Labor’s defeat in 1949. A host of reasons then kept Labor out of office for 23 years.
Looking just at banking policy, however, it seems clear that the concentration of banking power today in private hands is not all that different from what would have occurred had bank nationalisation succeeded. Just after the nationalisation announcement, the Sydney Morning Herald claimed that the plan meant that the Commonwealth Bank would control £800 million in deposits and shareholders’ funds in the biggest nine banks and be the largest banking monopoly in the world.
As noted above, the big four Australian banks today control more of our banking business than the top four banks in any other country. We avoided monopoly but copped oligopoly; we denied Chifley’s ideal of banking in the public interest but now endure the profit motive in spades.
Customers can judge the impacts of this history in areas like financial planning, insurance and interest rates. Banks still, in Chifley’s words of 1937, affect ‘almost every phase of national life’. Chifley’s remarks about the balance between banking profits and service to the community also remain extremely apposite.
Chifley-style nationalisation is presumably off the agenda but if anyone wanted to make a case for a tax on bank profits or for breaking up the large banks, evidence like that presented here would bolster their arguments. Perhaps recommendations in that direction might come out of a Royal Commission – if one ever happens – which might bring a chuckle of satisfaction from the ghost of a former Labor Treasurer from Bathurst.
David Stephens is secretary of the Honest History coalition and editor of its website (www.honesthistory.net.au). The views in this article are not necessarily those of all supporters of Honest History.
 Australia. Parliament, Report of the Royal Commission appointed to Inquire into the Monetary and Banking Systems: Parliamentary Papers, Session 1937, No. 74, Vol. V, General and Finance, ‘Dissent, reservation and addenda by Mr. Chifley’.
 Melbourne Corporation v Commonwealth (1947) 74 CLR 31;  HCA 26.
 LF Crisp, Ben Chifley: A Political Biography, Longmans, London, 1961, pp 327-28.
 For the 1949 campaign, Freeland and Austral, see Robert Crawford, ‘Supporting banks, Liberals and the “Australian Way”: the Freelands and the 1949 election’, History Australia, 2, 3, 2005, downloadable from Monash University e-press; David Stephens, ‘Political theory, history and the Australian Labor Governments, 1941-49’ (MA thesis, Monash University, 1974), available on microfiche at the National Library of Australia; David Stephens, ‘The effect of the Great Depression on the Federal Labor Governments, 1941-49’, Australian Journal of Politics and History, XXII, 2, August 1976, pp. 258-70.
 Bank of New South Wales v The Commonwealth (1948) 76 CLR 1; Commonwealth v Bank of New South Wales (1949) 79 CLR 497,  AC 235.