On 16 February 2017 the Senate established the Select Committee on Lending to Primary Production Customers to inquire and report on the regulation and practices of financial institutions in relation to primary production industries. This Rural Banking Inquiry is chaired by Queensland Senator Malcolm Roberts of Pauline Hanson’s One Nation party. The Select Committee is currently scheduled to report by 18 October 2017 and submissions are accepted throughout. The Terms of Reference specify the scope of the enquiry as follows:
“… to inquire into and report on the regulation and practices of financial institutions in relation to primary production industries, including agriculture, fisheries and forestry, with particular reference to:
- the lending, and foreclosure and default practices, including constructive and non-monetary default processes;
- the roles of other service providers to, and agents of, financial institutions, including valuers and insolvency practitioners, and the impact of these services;
- the appropriateness of loan contract terms particular to the primary production industries, including loan-to-value ratios and provision of reasonable written notice.”
LibertyWorks posted a written and signed submission to the Committee Secretariat on 27 July 2017. Some key highlights from this submission are the subject of the rest of this article.
In a nut shell, an anti-competitive and anti-consumer pyramid or Ponzi scheme has been established and maintained by government legislation and regulation. Besides Big Government itself, the key players in this scheme’ are the Reserve Bank of Australia (RBA) and the Big 5 Banks (ANZ, Commonwealth, National Australia, Westpac and Macquarie). This scheme grants uneconomic and unethical power to not just the RBA (to print unsound money) but to the Big 5 as well (to lend yet more unsound money), and therefore, as the old saying goes, power corrupts.
Even former Australian Treasurer Peter Costello was quoted, in The Australian by economist-journalist Adam Creighton in July 2017, as saying: “Sometimes I wonder whether those running the banks realise how important the government is to their business. Who benefits from this tightly regulated enterprise? Well, the government does, the shareholders of course, and the senior executives employed on handsome salaries to keep their operation ticking over. It’s the consumer that is feeling unloved.”
The LibertyWorks submission addresses the macro level issues of Australian and international money and banking that, in turn, ultimately drives and sustains most, if not all, of the micro level problems in lending to primary production customers.
The key macro level issues primarily emanate from a plethora of government legislation and regulation, especially that to establish and/or maintain an exclusive:
- a) monopoly on currency-based money by the RBA;
- b) license to create credit-based money not properly backed by sound money and deposit assets, or ‘out of thin air’ through Australian fractional reserve banking; and
- c) situation for the cartelisation of the banking industry by a Big 5 of Australian banks.
The above three macro level issues drive the micro level problems in primary production lending by:
- making available to banks easy money and credit (through a and b) and thus strongly dis-incentivising them to behave efficiently and ethically as though money and credit are scarce and that they have significant ‘skin-in-the-game’;
- dis-incentivising banks further to behave efficiently and ethically (through c) by granting anti-competitive favours to the Big 5 over the rest and imposing anti-competitive barriers on the rest under the Big 5; and
- facilitating 1. and 2. as well as unfair contracts and other anti-social behaviour through the plethora of government legislation and regulation which, in particular, crowds out the common law of property, contracts and tort. Such common law created by the people, was win-win and formed the basis for the rule-of-law. On the other hand, government legislation and regulation is created by the elites, is win-lose (by picking winners and losers, and by redistributing power and wealth) and has formed the basis for being ruled-by-laws.
These macro level issues, as well as the resulting micro level problems, arise due to government failure not market failure, that is, government control over market freedom. Government failure is very common and arises for a number of reasons. Professors Susan Dudley and Jerry Brito of the Mercatus Center provided some of the reasons from a Public Choice Theory perspective in a book entitled Regulation: “[P]olicy-makers cannot always predict the consequences of different policy choices, so market interventions may produce government failures. That is, even when a market failure is observed, a particular government intervention may produce even more inefficiency than the status quo as a result of the rent-seeking problem, unintended consequences, or both.” Eminent economist Ludwig von Mises wrote many decades before from an Austrian School perspective in his book Socialism that: “[S]ocialism [and government interventionism] suffers not only from a problem of incentives, but also from a problem of knowledge…government planners cannot engage in economic calculation.”
Many of the greatest economists of all time have recognised the massive economic dangers from large increases in the money supply, sometimes known as simply printing money and usually accompanied by the legalised counterfeiting known as fractional reserve banking (or fractional reserve lending). These dangers include causing, or at least making far worse, both economic booms and the resulting busts (mistakenly called the business cycle), as well as the rising cost-of-living (also called inflation). This cycle is mistakenly called “business” as it is primarily caused by government interventions in money and banking, and is not a natural and unavoidable feature of free market capitalism. This was recognised in the award of the Nobel Prize in Economics to Friedrich von Hayek. Chicago School economist Milton Friedman agreed in his book Money Mischief that: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Business cycles and inflation are flip-sides of the same coin of artificially rising values and prices effected by the cause of artificially rising quantities of moneys or money inflation. The boom-bust cycle typically happens first, with its uneven and less general price rises, followed by price inflation. The latter is a general price rise and thus a loss of the purchasing power of money for all, especially the poor and middle class. Both phenomena redistribute and destroy wealth and jobs, and thus create winners and losers. The winners are mainly the Big Banks, Big Business and Big Government (along with their mate’ in the media, NGOs and academia), and the losers of course being the rest of us. Regarding the winners and losers from inflation, Lord John Maynard Keynes once said: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
Australian financier Chris Leithner, in particular, concludes in his book The Evil Princes of Martin Place that the RBA “doesn’t fight inflation, it manufactures and maintains it”. Why is that? As Australian-Israeli economist Frank Shostak highlighted in his article How Much Money Should There Be?: “Most economists believe that a growing economy requires a growing money stock, on grounds that growth gives rise to a greater demand for money which must be accommodated.” However: “In short, within the framework of a free market, there cannot be such thing as ‘too little’ or ‘too much’ money. After all, people don’t want a greater amount of money in their pockets so much as they want greater purchasing power in their possession. Individuals who are striving to preserve their life and well-being will not choose a commodity that is subject to a steady decline in its purchasing power as money.” Thus: “The main purpose of managing the supply [of currency money] is to prevent various competing banks from over-issuing [credit money] and from bankrupting each other. This can be achieved by establishing a monopoly bank – ie a central bank – that manages the expansion of money.”
The preeminent economist Murray Rothbard in his book The Mystery of Banking made heavy use of T-accounts to illustrate loan banking, deposit banking, fractional reserve banking, free banking, central banking, money supply, market banking, government banking and reformed banking: “A must in making any sense whatever out of the banking system is to become familiar with the common accounting device of the T-account, or balance sheet [using] the Asset = Liability + Equity equation.” He also said: “[E]very business cycle is marked, and even ignited, by inflationary expansions of bank credit.” Because: “The central banks enjoy a monopoly on the printing of paper money, and through this money they control and encourage an inflationary fractional reserve banking system which pyramids deposits on top of a total of reserves determined by the central banks.” Hence: “The essential purpose of central banking is to use government privilege to remove the limitations placed by free [and competitive] banking on monetary and bank credit inflation.”
Appendix C of the LibertyWorks submission walks through Professor Rothbard’s T-account approach to properly understanding the banking system, especially that which has also been adopted here in Australia by the big federal government, monopoly RBA and Big 5 Banks cartel.
LibertyWorks suggested recommendations are therefore as follows:
- by August 2018, complete a Royal Commission into Australian and international money and banking focusing on the performance to-date and regulatory drivers of central banking, fractional reserve banking and banking cartelisation ;
- by August 2019, legislate for a comprehensive reform agenda of Australian money and banking focusing on removal of regulatory (and international treaty) barriers to sound money, free banking and banking competition; and
- by August 2022, complete the comprehensive reform agenda of Australian money and banking, including National Competition Policy (NCP) style payments.
These suggested reforms should not only restore accountability, integrity and fairness to rural banking in Australia but also be a catalyst to far greater stability, competition and innovation for the entire Australian economy for not only this generation of Australians but for many generations to come.
Darren Brady Nelson is on the LibertyWorks advisory board, an economic policy adviser to One Nation Senator Malcolm Roberts & a Liberty Evangelion