Is It Possible That an Independent Central Bank Is Impossible? the Case of the Australian Notes Issue Board, 1920-1924

By Coleman, William | Journal of Money, Credit & Banking, August 2001 | Go to article overview
Save to active project

Is It Possible That an Independent Central Bank Is Impossible? the Case of the Australian Notes Issue Board, 1920-1924


Coleman, William, Journal of Money, Credit & Banking


The history of the Australian Notes Issue Board over the period 1920-1924 is presented. It is shown that the Board was created as a genuinely independent monetary authority, but was soon abolished, as its policies antagonised interests upon which the government depended. The episode illustrates the thesis that the possibility of a genuinely independent monetary authority is problematic.

SINCE 1980 there has been a surge in the view that ahe central bank should be independent of government (for example, Alesina 1989; Parkin 1978). This has been accompanied by a wave of legislation to confer independence on certain central banks (the Reserve Bank of New Zealand in 1990, the Bank of France 1994, the Bank of England in 1997, the European Central Bank from its creation in 1998).

However, the wisdom of attempting to increase the independence to the central bank has been questioned. Most of the debate has concerned the benefits of independence (see Cuikerman 1992 and Grilli, Masciandaro, and Tabellini 1991). But there is also a question of the feasibility of central bank independence. In 1960, well before the current debate, the issue of feasibility was raised by Milton Friedman (1960). Friedman reasoned that the possibility of genuine central bank independence is doubtful, since a central bank is the creation of the legislature. If one act explicitly confers independence, a later act can take that independence away. This suggests that a central bank will remain independent only as long as it does what legislative power wishes it to do: true independence is impossible.(1)

Central bank independence, therefore, appears to founder on the impossibility of a sovereign power tying its hands. The significance of this impossibility has been explored in a number of contexts in the well-known time-inconsistency literature (Kydland and Prescott 1977).(2) Yet the impossibility of a sovereign power tying its hands appears not to have been assimilated by literature on central bank independence (or central bank contracts).(3)

An advocate of independence may reply that this case for the supposed infeasibility of central bank independence is exaggerated. Independence of the legislature can be secured by investing the independence of the central bank in a constitution that cannot be changed by the will of the legislature.(4) This reply, however, is not entirely effective. In some countries the constitution is the creation of the legislature (for example, the United Kingdom). Further, even if the constitution is independent of the legislature, the investing of independence in a constitution cannot assure the central bank's independence: for what one constitutional amendment can do, a later can undo.(5) Finally, the appeal to constitutional independence is not relevant to the evaluation of the moves to independence that the world has seen in recent years. All these have been in terms of a legislature granting independence. And, since the date of their independence, these newly independent banks have commonly been subject to pressure to act in ways agreeable to government.(6)

An episode in Australian financial history provides a sharp and documentable illustration of Friedman's infeasibility thesis. In 1920 the control of the Australian note issue was transferred from the Treasury and invested in a distinct authority, the Notes Issue Board, that was intentionally made independent. The board used its independence in a way that made itself politically unpopular. In accordance with Friedman's thesis, the board was after four years replaced by an entity more responsive to the government's wishes.(7)

The paper begins by tracing the origins of the board to the desire, in the aftermath of the inflation of World War I, to establish a note issue independent of the government. Sections 1 and 2 explain how the board's adherence to the quantity theory money committed it to two innovations in the Australian money supply process.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Is It Possible That an Independent Central Bank Is Impossible? the Case of the Australian Notes Issue Board, 1920-1924
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.