Escaping the Sovereign Debt Trap: The Remarkable Model of the Commonwealth Bank of Australia

Virg Bernero, the mayor of Lansing, Michigan, just won the Democratic nomination for governor of his state, making a state-owned Bank of Michigan a real possibility. Bernero is one of at least a dozen candidates promoting that solution to the states’ economic woes. It is an innovative idea, with little precedent in the United States. North Dakota, currently the only state owning its own bank, also happens to be the only state sporting a budget surplus, and it has the lowest unemployment rate in the country; but skeptics can write these achievements off to coincidence. More data is needed, and fortunately other precedents are available from other countries.

One of the most dramatic is the Commonwealth Bank of Australia, which operated successfully as a government-owned bank for most of the 20th century, until it was privatized in the 1990s. The Commonwealth Bank’s creative founders demonstrated that a government-backed bank can make loans without capital. Denison Miller, the Bank’s first Governor, was fond of saying that the Bank did not need capital because “it is backed by the entire wealth and credit of the whole of Australia.”

The Commonwealth Bank’s accomplishments were particularly remarkable considering that for its first eight years, from 1912 to 1920, it did not have the power to issue the national currency –unlike the U.S. Federal Reserve, which acquired that power in 1913.

The Commonwealth Bank was thus in the same position as a state of the United States or a member country of the European Union (think Greece), which also lack the power to issue their own currencies. Operating without that power and without startup capital, the Commonwealth Bank funded both massive infrastructure projects & the country’s participation in World War I.

According to David Kidd, writing in a 2001 article titled “How Money Is Created in Australia”:

“Australia’s own government-established Commonwealth Bank achieved some impressive successes while it was ‘the peoples’ bank’, before being crippled by later government decisions and eventually sold. At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia’s first world war effort from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction of 1%, thus saving Australians some $12 million in bank charges. In 1916 it made funds available in London to purchase 15 cargo steamers to support Australia’s growing export trade. Until 1924 the benefits conferred upon the people of Australia by their Bank flowed steadily on. It financed jam and fruit pools to the extent of $3 million, it found $8 million for Australian homes, while to local government bodies, for construction of roads, tramways, harbours, gasworks, electric power plants, etc., it lent $18.72 million. It paid $6.194 million to the Commonwealth Government between December, 1920 and June, 1923 – the profits of its Note Issue Department – while by 1924 it had made on its other business a profit of $9 million, available for redemption of debt. The bank’s independently-minded Governor, Sir Denison Miller, used the bank’s credit power after the First World War to save Australians from the depression conditions being imposed in other countries. . . . By 1931 amalgamations with other banks made the Commonwealth Bank the largest savings institution in Australia, capturing 60% of the nation’s savings.”

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