Ben Chifley was right all along about the banks

“Soup-kitchen” programs will be most valuable to the extent that they maximise infrastructure investment. However, even high-value public investment will be far from enough. Private investment in its rich variety is vital.

Longer-term restoration of stability to the global economy, calling for reform of the entire financial system, offers a far greater challenge. Crucially, it means basic reform of the banking system. If we do not get banking reform right the outlook for the global community will inevitably be bleak.

The real economy cannot flourish without an effective banking system which is responsible, well-regulated and vigorous. To be healthy and sustainable, the domestic and global economies must be nourished by real, mostly fixed-capital investment, growing real productivity and expanding real production.

These three elements - investment, productivity, and production - are the indispensable sources of income and wealth. They are equally essential for environmental and other sustainability.

The vital engine for stable, sustainable growth is real investment and the indispensable function of the banking system is to intermediate this real investment and, in so doing, to maximise the creation of real income and wealth. The banks - or more comprehensively, the financial services industry - should be efficient and, above all, have the highest level of professional and social integrity. They should abjure speculation and the manic nurture of a casino economy. They should be, as British Prime Minister Gordon Brown recently said, the servant, not the master of the economy and the society.

With this in mind, our purpose must not be to “bail out” or “rescue” existing banks which have failed their communities so utterly. Rather we must create, or transform, banks and non-banking financial institutions to play their historic, intermediating role in real investment to advance the welfare of the economy and society.

However, at this crucial moment in history, we must require of them even more than that. If banks are to do the job of getting the real economy back on its feet, they must - in the immediate future - fill the investment gap left by the collapse of the failed financial “system”. Many banks now cannot perform their basic task with anything like the vigour necessary to lift the debilitated economy out of the current depression with reasonable speed and completeness.

We must not waste public resources keeping zombie banks alive or being tender to toxic paper. Those resources will be better employed for the “soup-kitchen” emergencies or in restoring health to the longer-term domestic and global economies.

The failure of banks - a single bank, a group or virtually the whole system - offers an opportunity for our democratic communities to assume bank ownership and apply public resources vigorously to restoring and reinvigorating the real economy. Publicly-owned banks can demonstrate vigour and discipline in lending, vital to getting real investment, productivity and production going again at high levels, and to reducing unemployment, poverty and social distress.

That is the broad path along which all economies - and the global economy as a whole - should travel. Australia should take that path.

In the depths of the Great Depression in the 1930s, when the Australian Government appointed a Royal Commission on Money and Banking, a Labor politician called Joseph Benedict Chifley was among the more imaginative contributors to the Commission’s proceedings. He became Treasurer in 1941 and Prime Minister in 1945. His Banking Act of 1944 was one of the wisest pieces of legislation of the past century. It required banks to serve and be regulated by the society that endowed them with such enormous privileges.

The domestic flow of funds was to be managed for the welfare of the real economy, with real investment intermediated by the banks to be regulated to avoid “bubbles”, while nurturing healthy enterprise. The publicly owned Commonwealth Bank was invested with both central-bank and commercial-bank responsibilities. The Australian community was thus given an opportunity to participate directly in the real economy and “motivate” the private banks both through its central-bank controls and through benchmarks set by its commercial-banking enterprise.