Foundation for National Renewal     The "Model Constitution" Activity

Federal Election October 2004: Which Candidates Trust the People?

Task 26 is one of a series we will be doing on economic management. Australia is one of the most advanced and prosperous nations on earth. Despite this, we currently endure a million people out of work, skyrocketing personal debt, a balance of payments in serious deficit, and an Australian dollar worth only 66 US cents and/or 40 UK pennies. Something is seriously wrong. And when you add to this the fact that this is happening in a growing economy that is currently stronger than that of any other developed nation, one has to be seriously concerned about what will happen when our economy slows.

Many people will say, ‘Oh, we will have to leave this subject to the experts.’ I have to remind you, the ‘experts’ are the people running the show at the moment. They are the people that have got us into this mess and are either incapable or unwilling to get us out of it. ‘Economic rationalism’ is the flavour of the decade and no amount of facts and figures or argument seems to have any effect on this irrational fervour.

Many of you will recall the horrendous interest rates we suffered not so long ago. There was nothing ‘rational’ about the way interest rates escalated. The people were fed the fiction that Australia had to raise rates to keep pace with overseas rates otherwise there would be a massive outflow of capital and we would all be ruined. As a result, farms and businesses across the nation went to the wall and a lot were sold off. Well currently we have interest rates five times greater than those in the USA. Under the ‘logic’ used to justify high interest rates, we should be experiencing a flood of investment. The facts are that we can’t attract funding for half the activities needing funds. We can’t get funding for the AMC light metals project or the plastics project planned and half executed in Queensland and I suspect the same sorry state of affairs applies elsewhere.

Our current Constitution makes the following provisions.

Section 51. The (National) Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:-

(i) Trade and commerce with other countries….;
(iv) Borrowing money on the credit of the Commonwealth;
(xii) Currency, coinage, and legal tender;
(xviii) Banking,…….., and the issue of paper money;
(xvi) Bills of exchange and promissory notes

Section 81. All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.

(See “The Australian Constitution (Annotated)”, Professor Cheryl Saunders, for a plain English explanation of what all this means in practice.) (Available from FNR $15)

The Parliament and the Executive have had all the necessary powers since 1901 and it is currently failing. It isn’t working and the People have no safeguards in our current Constitution that would allow correction by the People. Australia once enjoyed the highest standard of living in the developed world. This standing has slowly been eroded until currently we are debt-ridden, under-employed and are quickly losing ownership of our assets and our industry. It is little consolation that the same has happened to every other country in the developed world and the under-developed world is even worse off. The solution rests with enshrining in our constitution some fundamental values that will prevent any government from repeating this disastrous exercise.

Before his death, B A Santamaria was one sane voice in the wilderness on these issues. You will recall the collapse of the ‘Asian Tigers” (Thailand, Malaysia, Indonesia and the Phillippines) in the late 1990s. The following is what Santamaria had to say in Oct 97. “It is not only the Asian Tigers whose economies are vulnerable to international speculators. Even advanced countries such as Australia place themselves at risk of economic and political collapse when four factors come simultaneously into conjunction. These factors are; a heavy, unrepayable load of foreign debt; a continual heavy current account deficit; a low volume of financial reserves; and open currency exchanges. The consequence is that governments forfeit control of capital movement in and out of the country. Australia labours under all four factors and, under existing policies, the situation will not change. If or when one of the celebrated international speculators has a crack at us is an open question.” Since then, we have seen the collapse of Argentine’s economy and we could be next.

What then is to be done? Santamaria's recommendations are as a follows:

1. The Reserve Bank must exploit the full power given to it to maintain full employment by financing public works at nominal interest rates.
2. The Commonwealth Bank or its equivalent must be rebuilt to make cheap credit available to small business and agriculture.
3. Australia's compulsory superannuation plan must be reorganised in line with the model of Singapore's compulsory Provident Fund.
4. We must reintroduce a compulsory allocation of 30 per cent of superannuation fund income to domestic bonds.
5. A 15% revenue tax or primage duty must be placed on all Australian imports.

Articulating the Problem

One of the problems with correcting current divergences is that there is only one system of economics taught at our schools and universities. This is the ‘economic rationalist theory’. We are going to have to look ‘outside the square’ to find a solution to this dilemma. However, there is a wealth of information in the literature. If we concentrate on deciding what is right and what is wrong, we can include in our ‘Model Constitution’ enough to ensure that the society we leave for our children and grandchildren will be better and more sustainable in the long term than what we have now.

Firstly we have to decide some simple criteria that will define the sort of society we aspire to. For example, are we comfortable with a situation in which so many of our young people can’t get a job when they leave school? There is no doubt that the amount of unemployment we endure at the present time, keeps wages down. This allows Australia to be competitive internationally, and it is argued that in turn creates jobs. But are we content to have so many young lives ruined by being unemployed for several years after leaving school?

To define the sort of society we aspire to, we have to go right back to first principles. The start point is our basic needs as individuals and the basic requirements of our society as a whole. I think it is fair to say that food, shelter, clothing and health are our basic individual needs; and security, a sense of community and opportunity for improvement are our basic collective needs. If we keep these basic facts foremost in our minds as we tackle economic issues, we should be able to include some provisions in our constitution that will ensure our model society does not get off the track.

‘Once-upon-a-time’, when there were few humans on the planet, there were enough caves to provide shelter, enough plants in the forest to provide fruit, vegetables and fibre, and enough animals to provide meat and skins for clothing. The combination of a healthy diet and no communal living, meant there was little in the way of health problems. Time not required for hunting and gathering could be used for play. However, as the numbers of humans increased, there arose a need to cultivate food. Some areas were richer than others in terms of more fertile soil, a better supply of water, etc, and some groups of people were prepared to work harder to provide a better life for their families. This led to avarice, and so families clubbed together to protect themselves.

Some people were better hunters and some people were better farmers. Furthermore, as societies developed and techniques improved, fewer people were required to grow food and more people were able to make things and exchange those things for food and clothing. Thus a barter system developed. But some people were required to defend the community and as this activity was difficult to barter, a system of exchange developed and this was the start of ‘money’. Along with the use of money as a means of exchange came ‘banks’ and the beginnings of an ‘economy’.

The above simplistic view of the development of human societies is outlined here purely to set the stage for ‘first principle’ thinking. And of course, modern societies are much more complex than the above might imply. However, if we keep the above in mind, we should be able to reduce the complexities of modern society down to basics and thus develop a system that will preserve our basic requirements.

The current system of international trade and ‘exchange’ came into operation following an international conference at Bretton Woods just before the end of WW2. Unfortunately for the rest of the world, the dominant position held by the USA (because of that nation’s decisive intervention in the war) led to the adoption of a system proposed by USA and very favourable to the USA. This scheme included the establishment of the World Bank and the International Monetary Fund (IMF). An alternative solution proposed at the time and favoured by most other nations was scrapped even before the conference. Under this scheme, J W Keynes proposed the establishment of an International Clearance Union (ICU) and a neutral unit of international currency called a Bancor. Under this latter scheme, all international trade would be bought and sold using this currency and individual nations would be expected to keep their accounts more or less in balance. That is, it would not matter if a nation bought from one country and exported to another, their “balance of payments’ could be equalised through the ICU. Sadly, this scheme was not adopted.

Another decision taken at Bretton Woods was that the official international currency would be gold and that gold would be valued in US dollars. (The USA was then holding 70% of world gold reserves.) This ‘Gold Standard’ meant the amount of money any one nation could produce depended on the amount of gold they had in the vault. Although not as good as a totally neutral currency as proposed by Keynes, this ‘gold standard’ was a good system. However, it was abandoned unilaterally by the USA on the principle that gold was in fact just another commodity and it was just as logical to produce money on the basis of a huge store of coal. Thus the US dollar became the de-facto international currency - a wholly unsatisfactory state of affairs.

Currently, national banks create national currency and the ‘exchange’ system outlined above determines the value of that currency on the world market. Inexplicably (and most unfortunately in my view) the authority to create most of a nation’s ‘money’ has been handed over to private banks. In the main, these banks create money through loans. That is, money is created as debt instead of as credit as it was not so long ago. The amount of money a bank could lend used to be tied to the amount of money in the vault - that is, the amount of deposits. Banks were allowed to approve loans for a little more than they had money in the bank and this was tightly controlled by national governments. This requirement has been so watered down over recent years that it is now almost nonexistent. Once again these explanations are simplistic, but they are accurate enough to convey the basics.

You have no doubt heard of ‘national debt’. It would be reasonable to assume that such debt must be owed to another country - probably America. Not so; America also has a national debt that is even more horrific than Australia’s. So to whom do we owe this ‘national debt’? The answer is of course, private banks from which we have borrowed money to finance ‘deficits’ and government projects beyond our ‘means’. This means that a large proportion of our ‘wealth’ is required to pay interest to private banks. But hang on, these banks don’t have that sort of money to lend. That is correct; they create it out of thin air and then charge us interest on it. You are right to conclude that ‘there has to be a better way’.

The current Government is trying to pay back all of the national debt using the proceeds from asset sales to save the billions of dollars expended annually on interest payments. Would you believe that financial traders and others in the ‘finance’ industry are arguing that we must have substantial debt so that we can have a ‘bond market’? The argument is that Commonwealth Treasury Bonds (the instruments raised to finance government borrowing) are the only risk free investment available to fund managers such as those managing superannuation funds. These are the sort of arguments continually being served up to the People of Australia. As you will see below, there is a better way.

Unfortunately, it gets worse. The value of our currency, the ‘exchange rate’ is determined by supply and demand on the world currency exchange market. This might seem to be a reasonable system. If a nation wants to buy the goods produced by another nation then the buying nation needs the currency of the selling nation. Unfortunately, the big multinational banks have such huge buying power; they are able to manipulate the currency market to their advantage. This manipulation creates such unpredictable fluctuations in the value of national currencies that international businesses have adopted the practice of arranging contracts of sale in US dollars. This has engendered value in US dollars far in excess of the ability of America to back it up. As soon as the Euro is established as a stable currency, I predict a huge drop in the value of the US dollar and that will have enormous consequences for America. Unfortunately, whatever is bad news for America is probably going to be bad news for us as well.

For individuals, a low ‘exchange rate’ means that such things as overseas holidays and imported goods are expensive. However, a low ‘exchange rate’ also means that our exports are very competitive (read cheap). Unfortunately, it means we have to produce and sell more at these cheap prices in order to try and balance what we are importing. Currently, we are getting so little for our exports, we can’t pay for our imports and so the ‘current account’ deficit is getting worse by the day.

In a utopian world we could have one currency. Not only would that solve many of the problems outlined above, it would be possible to directly relate the value of every commodity regardless of source. It would also be possible to directly relate wages in one country with those in another. No one nation would benefit or be made poorer by some artificial fluctuation in exchange rates. The currency speculators would be out of business. And the wealth of a nation would be directly related to their natural resources and the overall effectiveness of their people. However, in the current climate, one world currency would be seen by most as being yet another nail in the coffin of national sovereignty.

By now you may well be asking, ‘what has all this to do with banking?’ The answer will become clearer as we progress. In the absence of one world currency, Australia must regain control of our currency and the flow of money into and out of the country. If we created a national bank under the control of our Parliament and if we deposited with this bank the entire wealth of the nation; we could regain control of our wealth and our destiny. Our Mint could then produce the amount of money needed by the society on the CREDIT of our entire national asset. If our governments needed to create some infrastructure that required funds in excess of that collected in taxes, the necessary money could be borrowed from the nation’s own bank. Private enterprise could also borrow from the nation’s bank at minimal interest rates.

Similarly, if we reintroduce controls over imports and foreign investment (read stop ‘selling the farm’), we can regain control over the flow of wealth into and out of the country. We have had such controls before, but they have been abandoned in recent times in the interests of ‘economic rationalism’.

Possible Solutions

The most effective and efficient ways of resolving these problems would result from changes to the international methods of exchange and trade. But we have to be realistic. As ordinary citizens, it is beyond our capacity to change international agreements. We have to devise a system that will fix our problems within the constraints imposed by current international systems. (Even I agree that we cannot hope to change the world however desirable it might be.)

In devising a system for Australia, it is necessary first to establish the basics. The basic premise is that Australia belongs to Australians. We are a sovereign nation and sovereignty rests with the People. From this we deduce that the wealth of Australia; that is the combined value of our natural resources and the product of our work force, belongs to all Australians. The challenge is to develop a system whereby this wealth is used to benefit all Australians. The communists tried to do this but failed miserably. We will have to do better than to say, ‘from each according to his ability and to each according to need’ and then hand control over to a politburo! We need a strong Constitution that places and retains control in the hands of the People.

The second premise is that all national revenue (ie. Taxes) and the nation’s savings should be deposited with the nation’s own bank. This would include all things like superannuation. This would generate the funds needed to finance development in our own country. This would eliminate the current situation where our savings are being invested overseas (at a loss) leaving no money to finance projects in our own country - projects that would generate employment and reduce public expenditure on welfare. Local funding would also eliminate the payment of interest to overseas banks.

The third assumption is that the interest rate paid on savings would be enshrined in the constitution at one percent less than the borrowing rate. Typically, this could be 1% and 2% or 4% and 5% respectively. This would not only provide a guaranteed return on savings and a guaranteed source of affordable finance to the private sector, but it would also keep Australian wealth in Australia.

But what about the goods we want to import? My proposition is that we include in our ‘Model Constitution’ a stipulation that imports will only be approved to the extent possible without exceeding the value of our exports. Ideally, of course, we should only import what we can’t produce in Australia. If only we could adopt this principle, we would immediately improve our ‘value added’ regime a hundred fold. But, once again, we have to be realistic about how much we can change the world. However, by adopting this simple rule that import licences will be granted only to the extent that they can be balanced by our exports, we will achieve the following significant advantages:

1. We will maintain control over our ‘balance of payments’ and not get into debt.
2. We will encourage ‘value adding’ in Australia.
3. We will curb the outflow of wealth.
4. We will curb the tendency to flog off our mineral wealth and our agricultural produce at bargain basement prices.

Globalisation has resulted in international rules making it very difficult for nations to impose restrictions on trade across their borders. However, there are no rules (and nor can there be) that will compel a nation to purchase goods overseas that the nation can’t pay for.

What about the big, powerful multinational banks? Of course, again we have to be realistic. It would be impossible for a small nation like Australia to simply kick the multinationals out of the country; however desirable that might be. We will have to devise a system that will allow the private banks to function. If they can compete with the Nation’s own bank, then that is fine. However, there would need to be Constitutionally enshrined controls over the flow of funds out of Australia.

Of course, if we had to suddenly spend billions of dollars overseas for any reason, we could be right back where we started. Therefore, we would need to maintain a reserve that would be cashable overseas in an emergency. This reserve could accrue from the profit of our own bank and from our exports. It could be maintained in Australian and/or foreign currencies. Furthermore, we would need to maintain a credible defence force to obviate vast expenditure overseas in answer to each and every defence crisis.

The Nation’s bank would also need to have the power:

1. to issue currency in various forms,
2. to control, administer or prohibit the issue of credit,
3. to control, administer or prohibit the flow of Australian currency into or out of Australia, and
4. to control and fix the rate of exchange of Australian currency with respect to all foreign currencies.

Furthermore, the Nation’s bank would need to be run by a Board responsible and accountable to the National Parliament. The Parliament could also decide, from time to time, the amount of profit retained in the reserve and that returned to the People by being absorbed into revenue.

Conclusion

It is obvious to everyone that the nation’s roads and other infrastructure must be available to the populace without restriction or prohibitive cost. The same principle must be restored to our banking infrastructure.

Economic rationalism is just that, a rational approach to economics. But we don’t have an ‘economy’ just so it can be ‘rational’. The end product of our economy must be the health, wealth and happiness of Australians. Lack of control over our exchange rate, vast amounts of people out of work, continual upheaval as multinational corporations move industries to cheaper labour sources, etc, are not desirable attributes of economic management. Of course it is more ‘rational’ for goods to be produced where they can be most economically produced; but if that puts our people out of work and on to welfare queues, it does not make a lot of sense. There might be some point to economic rationalism if it could be proved that, after a short period of upheaval, everything would be being produced where it would be most economical to do so, the price of everything would come down, and we would all live happily ever after. The reality is of course that nothing is static. The upheaval will go on forever as the dynamics of change are repeated around the world. We have to get off this merry-go-round and a good place to start is by taking control of banking and regulating imports to balance exports.

If we refer back to our ‘first principles’, it is obvious that the reason for an ‘economy’ and therefore the manner of economic management, is to facilitate the wealth, happiness and well being of the People (of Australia). An essential element of economic management is control over finances. A national bank through which all public finance is channelled is far better than leaving this important element of our economy to some mythical ‘market forces’.

Is it possible to include in a constitution provisions that will achieve the obvious desirable outcomes? In the following paragraphs I have included a proposition to illustrate just how easily this could be achieved.

A Proposition

It is proposed that our ‘Model Constitution’ include the following:

Banking

This Constitution establishes a system of banking the aim of which is to serve the People of Australia. The central pillar of this system is the establishment of a national bank. This bank is named, ‘The Commonwealth of Australia Bank’.

The Commonwealth of Australia Bank shall have exclusive power to:

1. issue currency in various forms,
2. control, administer or prohibit the issue of credit,
3. control, administer or prohibit the flow of Australian currency into or out of Australia, and
4. control and fix the rate of exchange of Australian currency with respect to all foreign currencies.

All the financial assets of the Commonwealth of Australia shall be channelled through this bank. All Commonwealth revenue shall be deposited in the first instance into this bank.

All government expenditure shall be drawn on this bank. Under normal circumstances drawings shall not exceed revenue.

Governments at all levels shall not be required to pay interest on loans approved by this bank under the War and Emergency Services powers.

The Australian People shall have access to this bank for both deposits and loans. Deposits shall accrue interest at 3% per annum and approved loans to individuals and corporations shall incur interest of 4% per annum. Loans from the Commonwealth of Australia Bank shall form a substantial proportion of investment in commerce and industry.

All Nationally mandated savings such as superannuation shall be deposited with The Commonwealth of Australia Bank and shall accrue interest at 3% per annum.

Funding for all levels of government shall be managed through The Commonwealth of Australia Bank.

The Commonwealth of Australia Bank shall have the following powers and responsibilities;

1. to issue currency in various forms
2. to control, administer or prohibit the issue of credit,
3. to control, administer or prohibit the flow of currency into and out of Australia, and
4. to control and fix the rate of exchange of Australian currency with respect to all foreign currencies.
5. To maintain a reserve of funds for use in an emergency at the direction of the Parliament.

The Commonwealth of Australia Bank is prohibited from speculative trading or dealing in currency of any sort.

A Board responsible and accountable to the National Parliament will manage the Commonwealth of Australia Bank. The Board shall comprise the following:

1. Head of the Department of Treasury
2. Head of the Finance Department
3. Head of the Department of Foreign Affairs
4. Head of the Department of Trade and Industry
5. Head of the Department of Primary Industry
6. Head of the Department of Defence
7. Head of the Department of Tourism
8. The Chief Executive Officer

The Department of Trade and Industry shall grant import licences only to the extent that the revenue from exports can cover the cost.

The outflow of finance is subject to approval by Treasury under guidelines decided by the Parliament.

Task 26 - Banking

Question 1. Should We, the People of Australia, regain control over our destiny by including in the Constitution rules regarding Banking and International Trade?

Question 2. Should a new Constitution include provision for the establishment of the Nation’s own bank?

Question 3. Should the Nation’s bank be named “The Commonwealth of Australia Bank”?

Question 4. Should all public finance be channelled through the nation’s own bank?

Question 5. Should the People of Australia regain control of finance by specifying in the Constitution the borrowing and lending interest rates to be used by the Nation’s own bank?

Question 6. Should interest rates be specified as 3% and 4% respectively?

Question 7. Should control of the Nation’s own bank be vested in the Parliament?

Question 8. Should the composition of the Board of the Nation’s own bank be specified in the Constitution?

Question 9. Should a new Constitution for Australia specify that imports must be balanced against exports?

Question 10. Should a new Constitution for Australia specify that government expenditure should not exceed revenue?
(In other words, should we live within our means or is it OK for governments to rack up national debt, incur interest payments and leave it to subsequent generations to pay off the debt?)

Question 11. Should the powers of the Nation’s own bank be as specified in Paragraph 47 above?

Question 12. Do you agree with the proposition outlined in paragraphs 39 to 51 above?

Question 13. Do you recommend any modification of the above proposition?

Question 14. Do you have any suggestions for a different or better system?

·=============== ===============·

Last updated: 3 May 2006