The creation of a central bank in Australia was part of a general wave of central bank formation in a range of countries during the early twentieth century. This chapter briefly recounts the political history of central banking in Australia and provides further historical context to the current operations and especially the institutional underpinnings of the RBA. The role and institutional design of the Reserve Bank of Australia and its forerunner, the Commonwealth Bank of Australia, were established during bouts of political conflict in the first half of the twentieth century. In Australia the central bank occupied a zone of conflict between Labor interests and the private banking and financial community. The main contest was over the banks' private prerogatives and their control of the financial and credit system, with Labor interests being especially keen to regulate them. The independent powers conferred on the central bank created tensions with various governments. Generally, the major shifts in central banking have occurred under Labor governments: this is true of the origins of central banking and also of the major changes of the 1940s and the 1980s, the two watersheds of Australian central banking.

ORIGINS OF CENTRAL BANKING

Walter Bagehot, the third editor of The Economist, coined the term ‘central bank’ in 1873. Although some central banks emerged in the seventeenth century (in Sweden and England), and a few were created in the early nineteenth century (in France, Austria, Norway, Spain, Netherlands, Denmark, Finland), there was no clearly defined concept of central banking at this time.