To quote Bank of England Governor, Melvin King in 2010 of all the many ways of organising banking, the worst is the one we have today. The Bank of England continues as a thoughtful critic to this day. As well see below, our own central bank the Reserve Bank of Australia (RBA) not so much.

The fatal flaw in banking is that, although money is a classic public good, like the air we breathe or the radio spectrum, its privately created. Commercial banks like NAB or Westpac create money whenever they advance a loan. This private licence to print money creates four huge problems.

First the banking system and with it, the economy seizes up if private banks take excessive risks and go bust. Bailouts involve governments socialising the losses long after shareholders and executives have privatised the profits in hefty dividends and bonuses. And dont believe people who say we didnt bail out our banks. None went under because the banks lobbied for emergency guarantees for hundreds of millions of dollars and,with all hell breaking loose around the world, the government capitulated over a weekend.

Second, public officials influence the extent of banks money creation by influencing the appetite for bank lending (through the overnight cash rate). But borrowing and lending reflect animal spirits which strongly reinforce the economic cycle. So its notoriously tricky. Repeated interest hikes or cuts often fail to turn things around. Sometimes we overshoot as we did in the late 1980s. Sometimes, as now, we find interest rate cuts pushing on a string ineffective in increasing credit and investment until confidence returns.

Third, with surging current account surpluses from China, Germany and the Middle East for decades now, other countries can only relieve themselves of sluggish growth by further increasing debt and risking greater trouble ahead. Are you feeling lucky?

Fourth, if private banks creating money sounds a bit dodgy, it is. Economic reform reins in these kinds of privilege in other areas. Thus where it was once allocated to the lucky few, much radio spectrum is now auctioned, generating billions in government revenue. If governments created the money supply it would bring in_many_ _tens of billions,_perhaps a hundred billion in revenue.

Indeed, in 1933 at the nadir of the Great Depression, economists from the University of Chicago proposed that governments monopolise money creation. Starting after WWII young Milton Friedman championed the Chicago Plan. The textbook concern with this approach is that preventing private money creation will starve business of credit for working capital and for investment. Yet today, banks focus mostly on secured lending against mortgages, the main effect of which is underwriting a property price arms race.

In fact only around 10% of bank lending finances business operations. As the Great British economic journalist Martin Wolf explains, we could find other ways of funding this. Wolf goes on to outline the upside. If money growth was held to just 5% annually, theseignioragefrom government money issue would be around 4% of GDP. My rough figuring suggests Wolfs numbers are excessively conservative for Australia but using his numbers 4% of Australia GDP is 70 odd billion dollars of government revenue per annum!

Ive proposed a less radical plan Chicago Lite based on nothing more than the boilerplate economic principle of competitive neutrality. To prevent bank runs and stabilise liquidity in the system, the government-backed central bank goes banker to the banks. They make payments between each other using exchange settlement accounts provided to each bank by the RBA and manage their liquidity by borrowing and lending from the RBA. If they get those services from the central bank why cant we all?

This was only a theoretical possibility before the internet made it a practical one like it made it practical for your account with Amazon, or Qantas or a bank to bypass your bookshop, your travel agent or the local branch.

But Australias Reserve Bank Governor Philip Lowerecentlydismissed such ideas. Youd think he might have quoted some research: like the Bank of Englands which released research on a differentChicago Plan Lite.

Modelling the central bank issuing its own bitcoin style crypto-currency, their simulations suggested huge economic gains of 3% of GDP more than the PCs estimated gains from national competition policy throughout the 1990s.

Instead, he opposed these ideas on principle. Regarding my proposal for central banking for all, Lowe dismissed it because it would put the RBA in competition with the banks. For me, thats a feature, not a bug. Commercial banks bank with a peoples bank the RBA but we cant.

As the Bank of England paper noted, there are plenty of issues to be worked through. But none that cant be managed using standard principles like everyone meeting the full, unsubsidised costs of services they receive. The Governors other concern which extends also the issue of central bank digital currency is that anything that makes it easier for people to avoid depositing money with commercial banks threatens financial stability. Again I see this as a feature, not a bug an opportunity disguised as a problem. If the little people are still fleeing for safety while the smart money has long since departed, shouldnt we be asking why rather than lament their refusal to keep pretending?

Of course, Lowes concerns shouldnt be ignored. But they should be the beginning, not the end of our exploration for the best options. As I read Lowes speech I thought of the old Tariff Board of the early 1960s which would have been reluctant to countenance tariff cuts to our highly protected car industry (It recommended a local content plan in 1965. Why? Well because it would make life difficult for car manufacturers. Later it came to understand that the whole point of a level playing field was that you cant make things better for the best without making them tougher for the worst).

Or our Tax Office, which opposed Australias pioneering HECS initiative because using tax infrastructure to facilitate student loans would interfere with the Tax Offices_real_purpose.

If the Bank of England research is right, reforming our monetary system offers economic reform with benefits on a grand scale. Is it really asking too much of our own central bank, replete with substantial research capacity, protected with independence other civil servants could only dream of, to deliberate on such important matters with its lodestars beingreason, evidence and the public interest rather than the interest and comfort of the sector it regulates?

Postscript Complacency, what complacency?

In an earlier version of this column, I suggested that the Productivity Commission might be sympathetic to my argument that RBA competition with the banks was a feature, not a bug. In any event, in that spirit, Lateral Economics made a submission to the Productivity Commissions recent inquiry intocompetition in financial servicesoutlining the proposal. Silly me. The Commission has just released its draft report. It is over 600 pages so I cant claim to have read it all. But theres no sign of it that I can see and, on subjecting it to a word search, Lateral Economics turns up only in the list of submissions. Ill be attending their public hearings in the hope that the commissioners might be able to help me better understand why these ideas are so unworthy of consideration.

First published on The Mandarin as part two of an essay Now is the time for complacency.

Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Financial, Health Metrics and the Open Knowledge Foundation (Australian chapter). He is Visiting Professor at King’s College London and Adjunct Professor of UTS Business School. He was invited to present his paper Central banking for all: a modest proposal for radical reform to the Chief Economist and others at the Bank of England in 2015.