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Law Honours Thesis 2004

In search of the grundnorm of

Australian Monetary Policy

An inquiry into the validity of the legislative provisions applying to money in Australia

by: Andrew du Boulay

Front cover

The 1930 penny represents a splendid example of how the Treasury's monetary
policy decisions can affect the economic welfare of the individual.

The 1930 penny is probably the most famous of all the Australian Commonwealth
coins. It is not known exactly how many 1930 pennies were struck, but estimates
vary from around 2,000 to 10,000 with about 3,000 being the most commonly
quoted figure. The rarity of this coin is responsible for its high price. A 1930 penny
in fair condition1 will fetch something close to $20,000 but the World-record price
for a proof (mint condition) 1930 penny was realised at Noble Numismatics Pty Ltd
auction in March 2000. The ludicrous (but profitable) price was $285,000 for the one
ounce copper coin.

No-one is exactly sure how the 1930 penny came into existence. The Melbourne
Mint did not report any pennies being minted that year. However, the popular story
goes like this: 1930 was the depths of the great depression. Although the dies had
been cast for the 1930 penny it was decided not to issue the coin and Treasury did
not put through an order. The machinery had been set up, however, and it is thought
that the Mint staff produced small batches of the coin as souvenirs for curious
visitors. By swapping with a penny from their own pockets, the visitors were invited
to keep one of the shiny new pennies as a memento of their visit. By the end of the
year it was estimated that about 3,000 coins were distributed which were then
officially incorporated into circulation with the 1931issue 2.

Numismatic classification is actually misleading. A Good Fine (GF) example is rather average, with edge
filing, surface digs and scratches. A fair condition coin with substantial wear is classified as Very Fine (VF). The
best examples that fetch the highest prices are coins that have never been in circulation ~ called a proof.
Luck, P. (1992) Australian Icons: Things that make us what we are, William Heinemann Publishers,
Melbourne, Australia, p 151.
In search of the grundnorm of
Australian Monetary Policy
An inquiry into the validity of the legislative provisions applying to money in Australia

Thesis submitted by

Andrew du Boulay

November 2004

In partial fulfilment of the requirements for the

Degree of Bachelor of Law with Honours
from the School of Law,
James Cook University, Townsville.
Statement on access to thesis

I, Andrew du Boulay the undersigned and author of this thesis, understand that James
Cook University will make this thesis available for use within the university library in hard
copy as well as microfilm or other photographic or electronic means as they so desire. I
also acknowledge that the James Cook University Library will also allow access to users in
other approved libraries, both national and international. I do not place any restrictions on
access to this thesis.


Andrew du Boulay

12th November 2004


I, Andrew du Boulay, declare this thesis is my own work and has not been submitted in
any form for another degree or diploma at any university or other institution of tertiary
education. Information derived from the published or unpublished work of others has been
acknowledged in the text with references given.


Andrew du Boulay

12th November 2004


I wish to express my sincere gratitude to the staff of James Cook University. A special
thank you is directed toward the School of Law.

I would like express my appreciation to the Head of School, Professor Stephen Graw for
allowing me the opportunity to pursue an investigation into an area of law that has a
particular interest to me. It is appreciated that I was allowed the opportunity to qualify for
honours and hoped that this thesis will justify your decision. I would also like to thank you
for your guidance. You inspired the thirst for learning and directed that to fruition. Thank
you very much.

It must also be acknowledged that the tremendous wealth of knowledge Professor Paul
Haveman has brought to the Law School is greatly appreciated. Sir thank you for guiding
me in the initial stages of this project. You provided a dimension to law that up until your
acquaintance was lacking in my education. For that service I thank you.

I would also like to extend my appreciation to the economics honours team who allowed
me to join their group and engage in dialogue. I received credible advice as to the intention
and direction this thesis should take. You helped me identify a topic that was not only
applicable to economics but also pertinent to law. It is hoped that by combining aspects of
both disciplines ~ ie economics and law ~ I may be in a position to better understand the
complexities of the legal aspects of money and convey that knowledge in a suitable
manner worthy of acceptance.

To Diana Henriss-Anderssen a special thank you is extended. You were one of my first
lecturers when I enrolled at James Cook University in 1999, it is appropriate that you are
today, lecturing one of my last subjects. Throughout that time we have both continued to
learn, but I was by far the lucky one. I received the benefit of your wisdom. Up until a
short time ago, I was still trying to zero in on an idiosyncratic dimension to this thesis. You
imparted your knowledge and gave me the angle I was looking for. You will no doubt
recognise it in the theme of this document. Thank you Diana for your positive input.

Attention all, thank you for your positive and constructive feedback throughout this
programme. This thesis draws on the wisdom and education that all of you have
synergistically instilled upon me. I thank every one of you with sincerity and appreciation.

Moral and political judgements are of the same nature as
judgements of justice. They intend to express an objective
value. According to their meaning, the object to which they
refer is valuable for everybody. They presuppose an
objectively valid norm. But the existence and contents of this
norm cannot be verified by facts. It is determined only by a
subjective wish of the subject making the judgement.

Hans Kelsen (1944)1

Kelsen, H. (1944) General Theory of Law and State, translated by Andres Wedberg (1961), Russell &
Russell, New York, p 49.

An inquiry into the validity of the legislative provisions applying to money in Australia

This thesis seeks to discover the principles that guide decision makers with respect to
monetary policy within Australia. By examining the historical evolution of money and
scrutinising the introduction of currency within the Colonies through to the present
arrangements under the control of the Commonwealth Government, this thesis reveals the
machinations of Australia's monetary system. In order to discover the principles that guide
decision makers, this thesis analyses the legislative provisions that apply to the Australian
monetary system to source the legal validity of monetary policy. Principles of legal
philosophy are employed to assist with this task.

For the purpose of this thesis, monetary policy will refer to any activity undertaken by an
authoritative entity, which influenced, changed or distorted the amount or value of money
in circulation.

This thesis scrutinises three periods in Australian history to reveal quite remarkably
distinct phases, trends and subtleties behind the legal reasoning that motivated the acts of
Government. The three periods are; early colonisation from 1778 - 1824; the era leading
up to federation and into the first part of the twentieth century 1854 - 1950; and the third
period examines the latter part of the twentieth century to the present. In each phase of
economic development, the most appropriate philosophy that was/is applicable at the
respective time period, will be contrast with the acts of the decision makers to determine
the validity of their actions.

In each period, the economic viability of Australia was entrusted to the Government of the
day. In each period, a different system of money management prevailed which needed to
adapt to varying economic conditions. In each period, there was a different set of laws in
place with which the decision making bodies needed to comply with. In all three periods,
the policy makers exercised their power in accordance with, but under the influence of, the
evolving paradigms of law.

Hans Kelsen, ~ a twentieth century legal philosopher from Austria ~ coined the term
grundnorm. The English translation of that term means ground norm, which represents the
basic root source of valid law. This thesis employs Professor Kelsens philosophy to verify
whether or not the decision making bodies complied with the rule of law when they
formulated their policies. The thesis concludes its quest of discovery by sifting through the
temporal spheres of law to reveal the grundnorm of Australian monetary policy.

The Reserve Bank of Australia conducts monetary policy on an independent basis without
the disruptive influences caused by political parties. Monetary policy acts as a stand-
alone instrument, directed principally at achieving price stability within the economy. To
these ends, the sovereign State is a mechanism by which the human sense of community is
realised. The authority of that action is derived via the Constitution. The grundnorm of
which is the binding acceptance of the collective mass, who live under the reality of
commanding rules.


Title Page I

Statement on access to thesis II

Declaration III

Acknowledgements IV

Abstract VI

Chapter 1 Introduction

1.1 Sovereignty Money and Wealth 1

1.2 Thesis Objective 2
1.3 A hermeneutic paradigm 3
1.4 Thesis Structure 3
1.5 Methodology 5

Chapter 2 Concepts of legal philosophy

2.1 A background to law 6

2.2 The development of law 7
2.3 The English experience 8
2.4 The rule of law as a constitutional principle 10
2.5 The separation of power 12
2.6 The modern definition of a State 14
2.7 The constitutional system Australian style 15

Chapter 3 Money under the microscope

3.1 Money makes the world go round 17

3.2 History of money 18
3.3 Coinage and Sovereignty 20
3.4 Creative accounting ~ Roman style 21
3.5 The Anglo European experience 22
3.6 What a Sterling idea 23
3.7 The Bishop 23
3.8 The coin of the realm 24
3.9 Functions of Money 26
3.10 Different types of money 28
3.11 A modern definition of monetary policy 29

Chapter 4 Hans Kelsen: the man and his work

4.1 Introducing Hans Kelsen 30

4.2 The life of Hans Kelsen 30
4.3 Kelsen and the law 33
4.4 Defining the grundnorm 35
4.5 The validity of law 36
4.6 The grundnorm of the State 38
4.7 Kelsen applied to Australian sovereignty 40
4.8 A conspectus of the Australian Constitution Figure 1. 41

Chapter 5 Money in Australia

5.1 Colonisation 42
5.2 Governor Arthur Phillips monetary policy 43
5.3 Governor Philip Kings monetary policy 44
5.4 The Rum Rebellion 47
5.5 Governor Lachlan Macquaries monetary policy 48
5.6 The Holey Dollar 49
5.7 Banking 50
5.8 The retirement of the Spanish Dollar 50
5.9 The Laws according to Sir William Blackstone 51
5.10 The validity of the Governors actions 54

Chapter 6 A lucky country

6.1 Golden soil and wealth for toil 56

6.2 A Nation is born 56
6.3 Which Bank? 57
6.4 Some events of the last 40 years 60
6.5 Points for concern 62

Chapter 7 Rationale for strategies and implementation of current policies

7.1 An important development ~ Inflation targeting 63

7.2 Inflation over the long run Figure 2 63
7.3 Rationale of current policies 64
7.4 What does good monetary policy look like? 67
7.5 The process of inflation targeting monetary policy 68
7.6 The Reserve Bank of Australia 69
7.7 The relationship between the Bank and the Government 71

Chapter 8 In search of the grundnorm

8.1 The role of government in Australia 72

8.2 A Powerful Public Service 73
8.3 Discovering the grundnorm 75

Chapter 9 Independence, accountability, legitimacy and validity

9.1 Credibility and legitimacy 77

9.2 The rule of law in Australia 77
9.3 Applying Kelsen 78
9.4 Justification for delegation 79
9.5 Is there a problem? 80
9.6 Conclusion 80

Bibliography 83

Glossary of terms 90

Chapter 1


1.1 Sovereignty Money and Wealth

Money is a form of wealth. Governments create money. Therefore Governments create

wealth! Money is a commodity that humanity takes for granted, but what is money, how
is it defined, where does it come from and why do we use it? To add to this line of
questioning, we can further ask; what are the requirements for the creation of wealth in
the sovereign State and is this process legal? How is it possible to create wealth just by
printing money? Who is entrusted with the task of printing money? How do they know
how much to make? What rules do they have to follow? What law authorises the
production of money? How does the sovereign State ensure compliance and what
problems exist within that system? Is the sovereign State merely a mechanism by which
the human sense of community is realised and does monetary policy assist in achieving
that objective?

One of the hallmarks of national sovereignty throughout the ages has been the right to
create money 1. That right allowed the sovereign to lay down through law what was or
was not legal tender. The sovereign also enforced the requirement that the legal tender
would be accepted in settlement of debt within the countrys borders and maintained the
sole right of issuing all national money. No sovereign power controlled the way in
which individuals chose to use their money, that depended on the quality of the money
itself, on its real worth in relation to the goods it bought and on the choices of the free
market. If the ability to create its own domestic currency is a key distinction of a
sovereign State, what policies should be employed to control the process?

History is full of philosophers who have contemplated this topic. Starting in Ancient Greece with
Xenophone, the medieval times with Henry de Bracton, the middle ages with Saint Augustine and Bishop
Nicolas Oresme, and post Renaissance with Sir Robert Cotton, John Locke, Adam Smith and William
Blackstone, but to name a few.

1.2 Thesis Objective

The objective of this thesis is to validate ~ via legal philosophy ~ the actions of the
decision makers who formulated policies with respect to money in Australia. Although
monetary policy is a relatively new expression2 made popular by US economist Milton
Friedman3 in the 1960s as a system of money management, the actions of successive
Governors and Legislators throughout Australian history employed the tactics of
monetary policy unwittingly in order to enhance the level of trade and commerce in the
infant economy. So for the purpose of this thesis, monetary policy will refer to any
activity undertaken by an authoritative entity, which influenced, changed or distorted
the amount or value of money in circulation.

This thesis reviews the relevance of money, the issuance of currency and questions just
how legal the concept of money ~ and its policies ~ really are in modern Australia. This
thesis seeks to discover the principles that guide decision makers with respect to
monetary policy within Australia. By examining the historical evolution of money and
scrutinising the introduction of currency within the Colony of New South Wales
through to the present arrangements under the control of the Commonwealth
Government, this thesis reveals the machinations of Australias monetary system. This
thesis investigates the history of money. It looks at the constitutional considerations and
legislative framework that controls money within Australia. This thesis clarifies how the
concept of money is used to assist an economy in its day to day functioning. It studies
the nature of money within the national setting and reveals how the sovereign State
manipulates money to ensure the economic, social and political fabric of society is
stabilised to maintain peace and good order. In order to discover the principles that
guide decision makers, this thesis analyses the legislative provisions that apply to the

The modern perception refers to a process by which a government can manipulate the amount of money
in circulation within an economy in order to control economic activity. Up until the 1970s, economic
prosperity of a nation depended on the amount of gold it held. Because the value of paper money was
directly related to gold, governments could only issue notes if they had sufficient reserves of gold locked
away in their central bank to back up the amount of currency issued. US President Richard Nixon
dissolved the international gold standard in 1971.
Milton Friedman (b. 1912) won the 1976 Nobel Prize for economics. He was the leading exponent of
the conservative, free-enterprise point of view in modern economics originating from within the
University of Chicago. Friedmans monetary policy approach to economics offered a major alternative to
the fiscal policies of British economist John Maynard Keynes. Friedmans ideas had a profound impact
on economic policy decisions in Australia as well as those of the rest of the world.

Australian monetary system, to source the legal validity of monetary policy. Principles
of legal philosophy will be employed to assist with this task.

1.3 A hermeneutic paradigm

In order for the reader to appreciate the complexities of money, the thesis will briefly
explain the derivation of money from ancient times through to the present realities, this
thesis will enlighten the reader as to the origin and purpose of money. Having done that,
the thesis will then demonstrate how Government monetary policy has a powerful effect
on shaping a nation. Although the history of money can be traced through millennia,
this thesis will pay particular attention to the Australian experience. Throughout history,
philosophers have contemplated the idiosyncrasies of economic and legal thought.
Legal philosophy will be employed and directly applied to the history of monetary
policy from the time of British settlement up until the present day. In order to
conceptualise the legitimacy and validate the legislative provisions that apply to money,
this thesis will employ the doctrines of notable legal philosophers to gain wisdom into
the legal reasoning that was/is in place through each phase of Australias economic
development. These tools will be used to explain the paradigms that have existed and
the reasoning behind, and motivation for, the actions and policies that have shaped our
economic existence.

1.4 Thesis Structure

This thesis scrutinises three periods in Australian history to reveal quite remarkably
distinct phases, trends and subtleties behind the legal reasoning that motivated the acts
of Government. The three periods are; early colonisation from 1778 - 1824; the era
leading up to federation and into the first part of the twentieth century 1854 - 1950; and
the third period examines the latter part of the twentieth century to the present. In each
phase of economic development, the most appropriate philosophy that was/is applicable
at the respective time period, will be contrast with the acts of the decision makers to
determine the validity of their actions.

With respect to the original Australians, prior to the arrival of the First Fleet, economic
activity was restricted to a simplistic system of memorised barter. Although pure
communists within the tribe ~ the Aborigines reciprocated goods with rights of passage
and hunting entitlements with other tribes and clans. When the country was colonised

by the British, it was a penal settlement with forced labour. Convicts were virtually
slaves. Money was almost non-existent and a sophisticated system of I.O.Us developed.
The early Governors slowly created a viable economic system based on the issuance of
promissory notes and a sprinkling of coinage. In this period the Governors, acted as
agents for the British Government. The Governors discretionary authority was
delegated to them from a higher authority. In this period the legal validity of the
Governors decisions will be traced ~ via Sir William Blackstones Commentaries on
the Laws of England ~ to the sovereign.

The economy was dramatically transformed with Federation, when Australia was for
the first time entitled to issue its own national currency. In the elections of 1910 the
Labor Party won with a clear majority in both Houses of Parliament. At that time, some
form of intervention in national banking was widely expected. In November 1911 Prime
Minister Andrew Fisher4 introduced the Commonwealth Bank Bill into Federal
Parliament from which eight months later the Bank came into existence. The Australian
Constitution provides the basic rules for governing the country, binding everybody
including the Commonwealth Parliament and each State Parliament. Accordingly, any
action ~ including legislative action ~ is invalid if it is contrary to the Constitution.
Under the subsections of section 51 of the Constitution, the legislative powers of the
Parliament extended to making laws to control and regulate the receipt and use of coins
and legal tender. Coinage and legal tender involve quite specific and narrow concepts,
the former is concerned with coins as money and the latter with the prescription of that
which may be a lawful mode of payment. Currency is the broader expression. This is
exemplified by the provisions of the Currency Act 1965 (Commonwealth) which
illustrates the proposition that currency is a universal means of exchange, designated by
a particular unit of account5.

In the latter part of the twentieth century, a new global order of international finance
was created ~ of which Australia was an active participant. With improvements in
technology, a new system of economic management ~ Inflation targeting ~ came into
being. Inflation targeting is a system by which a Government can manipulate interest
rates in order to change the amount of money in circulation and control the level of

Labor Prime Minister serving three intermittent terms, 1908 to 1909, 1910 to 1913, 1914 to 1915.
See Jolley v Mainka (1933) 49 CLR 242 at 259-261, 266-269.

inflation. The amount of money in circulation directly affects the level of economic
activity. The wellbeing of Australias national economy affects the lives of all
Australians. Since the Government has delegated the responsibility of monetary policy
to the Reserve Bank of Australia (RBA), the Reserve Bank of Australia Act 1959 thus
becomes a starting point to understanding the complexities of one of the most
sophisticated economic management systems on the planet.

1.5 Methodology

In each period, the economic viability of Australia was entrusted to the Government of
the day. In each period, a different system of money management prevailed which
needed to adapt to varying economic conditions. In each period, there was a different
set of laws in place with which the decision making bodies needed to comply with. In
all three periods, the policy makers exercised their power in accordance with, but under
the influence of, the evolving paradigms of law.

Hans Kelsen, ~ a twentieth century legal philosopher from Austria ~ coined the term
grundnorm. The English translation of that term means ground norm, which represents
the basic root source of valid law. The root source of legal validity will be identified for
each period. This thesis will employ Mr Kelsens philosophy to verify whether or not
the decision making bodies complied with the rule of law when they formulated their

The evolutionary process of monetary policy reveals a startling synergistic reality. The
modern position, reaps the benefits of previous experiments. The combined effects of
technology, economic management, legal reasoning and political savvy, culminates in a
dynamic dimension where the utility of all Australians is maximised. The thesis
suggests that the Australian monetary system will continue its metamorphic evolution
towards its teleological state as the political economy homogenises into the global
arena. The thesis concludes its quest of discovery by sifting through the temporal
spheres of law to reveal the grundnorm of Australian monetary policy.

Chapter 2

Concepts of legal philosophy

2.1 A background to law

In the beginning there was only one law. It was the law of the jungle. The purpose of
that law was to ensure the survival of the fittest. The legislative mechanisms of law that
are in place today ~ ie the written codes of conduct, the rules and regulations of society,
the descriptions of what is right and what is wrong ~ what we can and cannot do ~ are
derived from natural and common law. No matter which culture or ethnic group we
examine, there exists a universal human paradigm, a belief that there is an inherent and
underlying set of values by which man should live. That amongst these is the
inalienable right that humans have to life, liberty and property. Our Western system of
governance is so designed to protect these rights. Built on the shoulders of the
generations that have preceded us, and those philosophers who planted the seeds of
progress, our modern sophisticated society allows us now to benefit and prosper free
from tyranny and oppression.

By nature man is competitive, but through compassion and love, man is also just and
forthright. It is this demarcation that governs man to:
Nurture the infant
Educate the young
Care for the sick and infirmed
Protect the weak
Rescue the endangered
Reward the industrious
Harness the energy of the strong
Use the inventions of the smart
Follow the advise of the wise and
Restrain the antics of the powerful.

It is through these immutable principles that human society aspires to:

Survive and prosper

Achieve excellence in its endeavours
Understand the oneness of humanity and
Make the world a better place for all.

But in aspiring to reach this teleological state, the principles that guide men and women
have evolved via some extraordinary stages.

2.2 The development of law

Anthropology presumes man made law evolved some 60,000 years ago as an antithesis
to the law of the jungle. Homo Sapiens are known to have existed 250,000 years ago,
but modern Homo Sapiens Sapiens ~ our own species ~ has only existed for some
35,000 years6. Although ancient sites reveal intricate burial rituals and ceremonial
customs that prove the existence of sophisticated hierarchical communes dating back to
Neanderthal some 70,000 years ago, the earliest extant examples of written law are only
5,000 thousand years old. Archaeologists regularly unearth baked clay tablets from
ancient Mesopotamia whereby the literature of the Sumerians reveals a simplistic
proverbial approach to education, business, wisdom and justice.

A restless woman in the house adds ache to pain.

We are doomed to die; let us spend.
We shall live long; let us save.
He who possesses much silver may be happy.
He who possesses much barley may be happy.
But he who has nothing at all can sleep.
You can have a Lord, you can have a king,
But the man to fear is the tax-collector7.

Reading the philosophical wisdom from Mesopotamia, we can assume not much has
changed in 5,000 years. Their society, like ours, had restless women, gods, rulers,
money, death and taxes.

Agamemnon, Odysseus, Aeneas, Aladdin, King Arthur, Lancelot and Robin Hood are
names which bring to mind some of the best-known myths and epics of human history.
Mankind has always expressed by mythology8 and legend its concern with the basic
need to have wise and heroic leaders. From Ancient Greece to the Middle-Ages
societies have favoured the brave nobility of the courageous but compassionate leader
and followed the advice of the wisest philosophers. In ancient times, the ruler who by
all accounts was the wisest was King Solomon, as revealed in the Book of 1 Kings in
the Old Testament.

Readers Digest (1985) The Last Two Million Years, The Readers Digest Association, London, p 13.
Ibid. p 54.
Bulfinch, T. (1860) Bulfinchs Mythology, reproduced in 1978 by Avenel Books, Crown Publishers,
Inc., New York.

God [apparently] gave Solomon unusual wisdom and insight, and knowledge too
great to be measured. Solomon was wiser than the wise men of the East or the
wise men of Egypt 9.

If we observe the psychology behind King Solomons employment of principles and

reasoning when he had to decide a difficult case in which two women were disputing
the maternity of a child, he sent for a sword and said Cut the living child in two and
give each woman half of it, we can appreciate that there was a methodology in his
harsh ruling. Naturally the real mother could not bear to have her child cut in half so
with a heart full of love for her child she said to the king Give the child to the other
woman. Upon hearing this Solomon knew instinctively that she was the real mother
and ordered her to take possession of the child11.

Thus the requirement for men to have wise and understanding leaders, endowed with
the blessing of God, became a prerequisite for good governance. The belief that mans
laws were some how designed and guided by a deity, gave rise to a perception of
natural law in which the Kings power was inextricably linked to the divine authority of
the Great Omnipresent Deitys will. Having such forces of nature working for the good
of man and nation could only mean one thing, God was on your side and woe be tied if
anyone or anything stood in your way.

2.3 The English experience

Political and religious philosophers promoted these ideas throughout Western

civilisation. It was an established maxim of English law dating prior to the times of
even Henry de Bracton12 in the thirteenth century AD ~ when he wrote on medieval law
in his work De Legibus et Consuetudinibus Angliae ~ that:

1 Kings 4:29. Good News Version.
1 Kings 3:16 - 28. Good News Version.

Based on the need to incorporate principles into the decision making process, no doubt the hard case
King Solomon had to judge would find a sympathetic ear with Ronald Dworkin. However it is unlikely a
judge in todays world could ever contemplate such a radical solution to a similar problem. The public
outcry would demand a lynching, but fortunately today, we also have DNA testing and the scenario
would not therefore be a hard case to judge.
Henry de Bracton (d. 1268) was a prominent English jurist who worked on the Kings Court of Assize
in SW England and is renown for writing the most comprehensive work on English medieval law.

Rex debet effe sub lege, quia lex facit regem ~ The Kings duty is to proclaim
lower rules because laws make rulers effective

In omnibus, imperatoris excipitur fortuna, cui ipsas leges Deus subiecit ~ In all
transverse things it is commanded ~ except in fortune or luck ~ that it is itself
law subject to God 13.

Ea quae jurisdictionis sunt & pacis (sayes our Bracton) ad nullumpertinent nisi
ad Coronam, & dignitatem Regiam, nec Coron sepa-rari poterunt, cum
faciant ipsam Coronam, ~ Those things having to do with jurisdiction and peace
pertain to no one else but the Crown, and the royal dignity, nor could they be
separated from the Crown, even though they support the Crown14.

The essence of this was, the king himself ought not to be subject to any control, but
subject to God and to the law, for the law made the king.

In the English world, this train of thought lasted for over a thousand years, to be finally
challenged when Oliver Cromwell sought to redress King Charles I. In the English Civil
Wars, King Charles was ultimately defeated by the Parliamentarians in 1648, and tried
for treason by a specially created court. He refused to enter a plea at his trial and was
convicted and sentenced to death. Charles declared on the scaffold that his duty had
been to care for his subjects as a loving father, that he had been divinely chosen to
govern, and that a subject and sovereign were clear different things. Nevertheless, he
was beheaded on the 30th January 1649 and a new era of rule by the [privileged] people
for the [privileged] people began.

So through the millennia the human race evolved and developed a system of rules by
which it felt necessary for the smooth functioning of society and thus the State. The
concept of the rule of law which employs a simplistic method of arbitration bases its
precepts on equality before the law.

de Bracton, H. (1257) De Legibus et Consuetudinibus Angliae, ch VIII, p 38 (39). English translation
Copyright (c) 1968-1977 by the President and Fellows of Harvard College.

Sir Robert Cotton, quoting Henry de Bracton in An answere to certaine arguments, raysed from
supposed antiquitie and practise, by some members of the Lower House of Parliament to prove that
ecclesiasticall lawes ought to bee enacted by temporall men. Manuscript [n.p., ca. 1640] 10f.(19p.) Publ.
in Cottoni posthuma, (London, 1651). v.1, f.35-44.

2.4 The rule of law as a constitutional principle

The rule of law is found in the constitutional writings of John Locke15, in which he
theorised that the purpose of law was to eliminate arbitrariness and uncertainty in
human affairs. Accordingly, the freedom of men under government, is to have a
standing rule by which to live by16. As the first systematic theorist of the philosophy of
Liberalism, Locke exercised enormous influence in England, France and America. In
his Two Treatises of Government (1690), Locke set forth the view that the State exists
to preserve the natural rights of its citizens, that when Governments fail in that task,
citizens have the right, ~ if not the duty ~ to withdraw their support and rebel.

The French philosopher and social critic, Jean Jacques Rousseau17 exerted a profound
influence on the political thought of the late eighteenth century, particularly that of the
French Revolution. In 1762 he published The Social Contract , a major work of
political philosophy, in which he looked inward for the fundamental source of moral
obligation. For Rousseau, the moral realm served as an absolute and independent
standard relevant to actual society.

One of the first principles of Rousseaus political philosophy was that politics and
morality should never be separated. The second important principle was freedom, in
which the State was thus created to preserve. The State was an entity that expressed the
general will as contrast to the will of all, which expressed the mutual desires of the
majority. John Locke had assumed that what the majority wanted, must be correct.
Rousseau questioned this assumption, arguing that the individuals who made up the
majority may, in fact, wish something that was contrary to the goals or the common
good of the State. The general will was to secure freedom, equality and justice within

John Locke, (b.1632) was an English philosopher and political theorist. He undertook his university
studies at Oxford.
Locke, J. (1690) Two Treatises of Government - II, Peter Laslett edition (1970) Cambridge University
Press, Cambridge, UK, p 284 ss 22.
Rousseau was born in Switzerland in 1712. In his publications, Rousseau articulates the conflict
between societies and the nature of man. Rousseau shared the view that society had perverted the noble
savage who lived harmoniously with nature, free from selfishness, want, possessiveness, and jealousy.
Rousseau believed that all social relationships were based on an inequality that resulted from an unnatural
distribution of power and wealth.
Rousseaus Social Contract Theory (1762) was copied from and expanded upon the earlier work of
British writer Thomas Hobbes who wrote in his masterwork The Leviathan (1660) of the contractual
agreement man has with his society.

the State, regardless of the will of the majority. In the Social Contract, individual
sovereignty was given up to the State in order that the goals of the State might be
achieved. If a State however, failed to act in a proper moral fashion, it would therefore
cease to exert genuine authority over the individual.

An important factor, for Rousseau, in ensuring the cohesion and proper functioning of
the State demanded that all citizens subscribe to beliefs in; a supreme being; a personal
immortality; the reward for virtue and punishment for vice; and the principle of
toleration. For Rousseau these appeared to be clear and self-evident principles that
could and should be adopted by any rational and moral agent. Only by keeping all of
these factors in mind was it possible to constitute a State that fulfilled, rather than
corrupted, the natural goodness of humanity.

Similar thoughts to those of Locke and Rousseau were argued by the nineteenth
century legal theorist Albert Dicey19. Dicey identified three characteristics of the
concept of the rule of law. First, the rule of law meant supremacy of law as opposed to
the influence of arbitrary power. The consequence was that only a distinct breach of the
law was punishable. Secondly, it meant equality before the law. No man was above it,
but rather everyone was subject to it. Lastly, it was to be regarded as a formula for
expressing that the law of the Constitution was not the source, but the consequence of
the rights of individuals. Natural rights he believed, existed independent of society,
therefore it required that the law of the Constitution promoted these rights. These rights
were; the right to personal freedom; the right to freedom of discussion; and the right of
public meeting20.

From Locke, Rousseau and Dicey come the necessary ingredients of a doctrinal recipe
for popular sovereignty. Locke envisioned the delegated transfer of legislative and
executive rights to the Government conditioned upon its ability to preserve life, liberty
and estate. The Governments legitimacy was to be rooted in consent granted by the

Albert Dicey (b. 1835) was a British jurist and constitutional theorist. He was a professor of Law at
Oxford and a leading constitutional scholar of his day. In his first major work, An Introduction to the
Study of the Law of the Constitution, Dicey warned that freedom was under attack by modern incursions
against the Rule of Law. He understood that the freedom British subjects enjoyed was dependent on the
sovereignty of Parliament, the impartiality of the Courts free from governmental interference and the
supremacy of common law.
Dicey, A. (1885) Introduction to the Study of the Law of the Constitution, 1950 edition, McMillan,
London, p 202.

peoples representatives. In the event of sustained tyranny or subversion of the proper
rule of law, consent could be withdrawn and justification for rebellion or revolution
could follow. Sovereignty resided in the people and their inalienable rights ~ derived
from Natural Law. The Governments authority was a delegated power held in trust, and
therefore liable to withdrawal if the equal rights of individuals and the common good of
society were not sufficiently respected 21.

2.5 The separation of power

Charles Louis de Secondat, Baron of Montesquieu 22 was a French political philosopher,

historian and jurist. In 1734 he published Considerations on the Causes of the
Greatness of the Romans and Their Decline, emphasising the strength of republican
civic virtue as opposed to the inevitable weakness of tyranny and conquest. This work
met with immediate success throughout Europe and is considered to be one of the first
important works dealing with the philosophy of the State. The idea of constitutional
separation of powers has its origins in the writings of Aristotle, but became influential
in the eighteenth century through the observations of Montesquieu whose elaboration of
it was based on a study of John Lockes writings. By far the most important of
Montesquieus work, The Spirit of the Laws, was a comparative study of three types of
government ~ a republic, a monarchy, and despotism. Abandoning any absolute
statement of human nature, it asserted that multiple solutions existed to the problems of
government and freedom, and that those solutions depended on the differing guiding
principles of societies.

Montesquieu was particularly concerned with the preservation of political liberty.

Following the English model of government, Montesquieu proposed that the powers of
government ought to be separated in order to ensure individual freedom. He wrote in
Chapter six of Spirit of the Laws the matter of the English Constitution. The following
is a brief extract.

Waldron, J. (1999) Law and Disagreement, Oxford University Press, Oxford, UK, p 255.
Charles Louis de Secondat, Baron of Montesquieu, (b. 1689) constructed a naturalistic account of the
various forms of government, and of the causes that made them what they were. He used this account to
explain how governments might be preserved from corruption. He saw despotism, in particular, as a
standing danger for any government not already despotic, and argued that it could best be prevented by a
system in which different bodies exercised legislative, executive, and judicial power, and in which all
those bodies were bound by the rule of law.

The political liberty of the subject is a tranquillity of mind arising from the
opinion each person has of his safety. In order to have this liberty, it is requisite
that the government be so constituted as one man needs not be afraid of

When the legislative and executive powers are united in the same person, or in
the same body of magistrates, there can be no liberty; because apprehensions
may arise, lest the same monarch or senate should enact tyrannical laws, to
execute them in a tyrannical manner

Again, there is no liberty, if the judiciary power be not separated from the
legislative and executive. Were it joined with the legislative, the life and liberty
of the subject would be exposed to arbitrary control; for the judge would be then
the legislator. Were it joined to the executive power, the judge might behave
with violence and oppression. There would be an end of everything, were the
same man, or the same body, whether of the nobles or of the people, to exercise
those three powers, that of enacting laws, that of executing the public
resolutions, and of trying the causes of individuals

Political liberty is to be found, only when there is no abuse of power. But

constant experience shows us that every man invested with power is liable to
abuse it, and to carry his authority as far as it will go... To prevent this abuse, it
is necessary from the nature of things that one power should be checked on
another... When the legislative and executive powers are united in the same
person or body... there can be no liberty...

As in a country of liberty, every man who is supposed a free agent, ought to be

his own governor; the legislative power should reside in the whole body of the
people. But since this is impossible in large States, and in small ones is subject
to many inconveniences, it is fit the people should transact by their
representatives what they cannot transact by themselves

The inhabitants of a particular town are much better acquainted with its wants
and interests, it is proper that in every considerable place, a representative
should be elected by the inhabitants When the deputies, represent a body of
people, they ought to be accountable to their constituents All the inhabitants
of the several districts ought to have a right of voting at the election of a

The executive power ought to be in the hands of a monarch, because this branch
of government, having need of dispatch, is better administered by one than by
many: on the other hand, whatever depends on the legislative power is often
better regulated by many than by a single person23

This writing had a strong influence on the drafters of the Constitution of the United
States of America and subsequent to that, Australias own Constitution. The great
architects of the Australian version included such notables as, Andrew Inglis-Clark,

de Secondat, C. L. Montesquieu, Baron (1748) The Spirit of the Laws, as translated by Thomas Nugent
(1823), Chapter 6 Of the Constitution of England.

Henry Parkes, Charles Kingston, Richard OConnor, John Downer and Edmund Barton,
but by sheer determination the bulk of Australias Constitution was drafted by a
Welshman who had become the Queensland Premier. Although ideas and suggestions
came from many sources, all the drafts were in the hand-writing of Samuel Griffith24
who, after Federation, became the first Chief Justice of the High Court of Australia.

Although the Australian Constitution was conceived, drafted and approved by

Australians, the Constitution was in fact an enactment of the British Parliament made on
the 9th July 1900 and titled the Commonwealth of Australia Constitution Act. The
Constitution established the Federal system of government whereby power was
distributed between the central or Commonwealth Government and the six regional
State Governments. The Commonwealth of Australia was based on a model of a
constitutional monarchy, with a Governor General appointed as the Regents
representative, a bi-cameral system with Upper and Lower Houses of Parliament,
separation of powers between the Executive, Legislature and Judiciary, and
representative government based on democratic elections. In sum, the Australian
Constitution incorporated the moral, legal and philosophical principles that were
invoked by mans desire to master and tame his corporeal environment and his
corybantic existence.

The notion of popular sovereignty served to account for the transition from the state of
nature to the temporal realm of the political State. Through the authority of a
Constitution, societies embodied the basic principles and rules that they wished to live
by into written form. The Constitution thus gave legitimacy and certainty to the conduct
of human affairs.

2.6 The modern definition of a State

The State is frequently defined as the highest or most comprehensive political

association having a recognised claim to primacy ~ ie: the first allegiance or ultimate
authority to which individuals obey. An impediment to the interpretation of the State is
that notions about what the State is, vary systematically with the various political
philosophies; a Lockean Liberal who advocates a minimalist State that merely enforces

Paul Brunton, curator of manuscripts at the State Library of New South Wales, as reported by Doug
Conway in the Townsville Bulletin, Saturday, 13th March 1999, p 24.

natural law and protects natural rights will never be able to agree with a Marxist 25 who
sees the State as a committee for the management of the interests of the social class
owning the means of production. Defining the State is not easy unless one is prepared
to declare dogmatically that a particular theory of statehood is correct, to the exclusion
of all others. The same difficulty afflicts any effort to express what the States purpose
is. A Utilitarian26 will urge that the objective of the State is the greatest happiness of the
greatest number, and that the pursuit of this end gives the State legitimate authority. A
Kantian27 will suggest that the State exists to provide a legal context within which good
will and respect for persons is a theoretical possibility.

Neither is tracing the origin of the State free of this same difficulty. Aristotle insisted on
natural sociability as creating States, believing that the stateless human is either a beast
or a god. Saint Augustine stressed human depravity in a fallen world created the need
for the State. Thomas Hobbes traced the foundation of the State to a desire for security
and peace. Edmund Burke put forward economic motives such as a desire for the
division of labour and an economy of scale, which can be obtained only by centralising
power and authoritatively allocating work. In trying, then, to say what the State is, what
its purposes are, and where its origins lay, the problem persists that the State is itself not
simply a fact but a conceptual edifice. The most reasonable and candid way to treat the
State, therefore, is to view it from todays perspective of being a regime that; enjoys the
rights inherent in full sovereignty whereby it may freely choose and develop its own
political, social, economic, and cultural systems; has a permanent population that abides
by and is subject to the rules and sanctions of a legal system; the territory of which is
geographically defined having undisputed title, territorial integrity and political
independence; is obligated to respect the sovereignty of other States and is entitled to
enter into relations with other States; has international obligations to live in peace; and
is more than likely a member of the United Nations28.

A follower of the philosophy of Karl Marx which expresses that the State should own the means to
A follower of the philosophy of Utilitarianism which expresses the greatest good for the greatest
A follower of the philosophies of Immanuel Kant. Kants philosophy is generally designated as a
system of transcendental criticism tending towards agnosticism in theology that favours the view that
Christianity is a non-dogmatic religion.
Harris, D.J. (1998) Cases and Materials on International Law, Sweet & Maxwell, London, Chapters, 1,
4, 6 & 10.

2.7 The constitutional system Australian style

The constitutional system of government exists where a Constitution is supreme and

regulates the exercise of power by the main organs of government with the consequence
that every act by parliamentarians and public servants is carried out in accordance with
the law and every such act is authorised by law. The emphasis should be placed on the
words authorised by law. Authorised laws confer wide and unfettered discretionary
powers over fundamental matters, which affect individuals. To obtain a clearer notion
of the function of constitutionalism, it is important to recall that democracy does not
eliminate political responsibility. The power of men over men remains. Relations of
dominance and submission, leadership and influence are not abolished. Democracy
attempts to increase individual freedom and general participation by promoting an
ordered civil society built around principles of power and leadership. It is the
quintessence of constitutionalism to instil the general goals of democracy so deeply in
the political habits of both the rulers and the ruled that behaviour consistent with
democratic ideals will always prevail. A perfected Constitution need not bar innovations
in policy or governmental forms but it can nevertheless, provide a protective device that
will ensure maintenance of broader, more permanent community goals. A Constitution
may thus correctly be called a conserving force, discouraging impetuous change but not
necessarily impeding cautious reforms.

If government is to be possible in the modern State, representative democracy is

obviously a necessary instrument to channel the publics power into a workable system
of self-government. Should our system accommodate other democratic forms in
expressing the power and the will of the people? A primary function of responsible
government is to bring the administrative system under the review and control of the
people. Individual Ministerial responsibility was intended to capture the essence of this
intent. If sovereign power resides in the people and if, in consequence, government is a
Trust for the people, do our present institutional arrangements provide sufficient
reassurance that service of the people, is and will be, honoured as, the first obligation of
all of our public officials? The RBA has a delegated responsibility, entrusted to them by
the Government. But as it has just been outlined, the first obligation of public officials is
to the Australian people. The question then is, are the RBAs officers also responsible to
the people of Australia? Does the accountability of the Government extend to the
delegated power entrusted to the RBA? This thesis will address these questions in

Chapter 7, when it reveals the process by which the RBA has the power to affect the
livelihood of every Australian.

Chapter 3

Money under the microscope

3.1 Money makes the world go round

In law as in life, we know money exists, but do we understand it? Our limited
perception of money is often obscured by subjective reason, that is; we only understand
the meaning of money as to how it relates directly to us as an individual. Having a
perception that is based solely on our own limited experience however may ~ as is
mostly the case ~ eventually prove to be a faux pas. To give an example of one such
mistake, at the opening of an exhibition, the US Federal Reserve Bank chairman Alan
Greenspan commented:

The other day I told a spendthrift friend that I had to deliver a short
address on the history of money. He responded, I understand the
history of money. When I get some, its soon history 29.

Unfortunately, many of us can relate to that scenario. Our personalised view of money
is formed by our own circumstances and experiences that we have with it. Our logic
tells us, money allows me to buy stuff. I want more stuff. Therefore wouldnt it be nice to
have more money. This interpretation of money is predominantly universal throughout
global society. Regardless of whether you are Bill Gates, Rupert Murdoch, Kerry
Packer or just plain average Joe Citizen, we all have a tendency to want more stuff.
Money thus becomes a mechanism which is highly prized. Our life style is shaped by
how much money we posses. Our actions are motivated by our desires. Our
interpretation of money is reinforced by our experience. Our views are sometimes
distorted by our beliefs. On many occasions our beliefs may be proven wrong.

Greenspan, A. (2002) The History of Money, Remarks by the Chairman of the US Federal Reserve
Bank, at the opening of the American Numismatic Society Exhibition, in New York, on 16 th January
2002. Available at

In the Old Testament30, the abundance of possessions is described as the mark of Gods
blessing ~ Bill Gates, Rupert Murdoch and Kerry Packer have surely been blessed have
they not? It had nothing to do with being born into an entrepreneurial family to start
with, nor had any bearing on their environmental upbringing or education in business,
not to mention their own ruthlessly efficient desire to become rich and powerful. No!
Such wealth is the mark of Gods blessing. It must be true ~ it is in the Bible! And what
about this one from Jesus31, it is much harder for a rich person to enter the Kingdom of
God than for a camel to go through the eye of a needle. How can you squish a camel
through the eye of a needle anyway? Does this mean Bill, Rupert and Kerry arent
going to make it to Heaven? Who amongst us is game enough to tell them that? I trust I
have made my point! As these ancient parables demonstrate, sometimes our beliefs and
perceptions maybe wrong. So too, is it with average Joes modern perception of money.
To eliminate some of the myths surrounding money, this thesis will now explore one of
humanitys great love affairs.

3.2 History of money

There exists much speculation about the origin of money and its role in primitive
society. One school of thought argued that in primitive societies money was used not for
everyday trade but mainly for certain ceremonial and public transfers, such as tribute,
bride price and blood money.

Secular customs and religious authority, have been instrumental in the development of
both money and banking. Although the inconvenience of barter was a factor in the
adoption of money, it was just one factor among several. Tribute to priests, chiefs or
kings, compensation by bridegrooms to the parents of the bride for the loss of their
daughters services on marriage, compensation for crimes such as murder, and rituals
involving competitive exchange of gifts, were all governed by laws and customs which
often specified the forms and amounts of payments. It was for such purposes, rather
than for the everyday exchange of goods, that money was originally developed in most

Book of Deuteronomy 6:11. Book of Job 42:12.
Book of Mark 10:25. Good News version, Bible Society of Australia, Canberra.

The value of gold and silver was quickly learnt by mankind. Since time immemorial,
societies have used them as a medium of exchange. The reason for this is that both are
relatively scarce in comparison with other substances. In addition to scarcity, the fact
that both metals are relatively soft, malleable and shiny further added to their aesthetic
usefulness as money. Metal was an obvious form for money in that it was reasonably
indestructible, giving it a long life as a medium of exchange. Further, gold and silver
were ideally suited for use in that both were easily divisible into smaller units and
consumed relatively little space.

The Bible mentions gold as a medium of value in the book of Genesis, which according
to synchronisation, would be almost 6,000 years ago ~ And a river went out of Eden,
and the land of Haviliah, where there is gold, and the gold of that land is good 32. Silver
is first mentioned in the Bible in the time of Abram ~ Abram was very rich in cattle, in
silver and gold 33. The first use of earrings and bracelets as a form of wealth appears in
the Old Testament when Rebecca was fetching water at the well. This habit grew and
extended also to include anklets and was the first conception of the idea of saving. This
saving led to more rings and eventually developed into rings being used as money. The
man took a golden earring of half a shekel weight and two bracelets for her hands of ten
shekels weight in gold . The ancient Hebrews measured the value of their wealth
expressed in shekels, being weighed out, not counted ~ in Hebrew the term shekel
means to weigh. The earliest mention of the word money also occurs in Genesis, he
that is born in the house or bought with money35. While the Bible is replete with
references to gold and silver as money, no reference to paper as money is to be found36.

The Chinese assert a coinage for forty centuries, but it seems to have originated
separately from the Biblical example, being different from those of all other countries,
yet created through the same necessity of having some metal of a certain value to use as

Book of Genesis 2 : 11-12, King James version.
Book of Genesis 13 : 2, King James version.
Book of Genesis 24 : 22, King James version.
Book of Genesis 17 : 12, King James version.
The Chinese developed paper money circa 800 AD, in the reign of Emperor Hien Tsung. A severe
shortage of copper for making coins causes the emperor to issue paper money notes.

a medium of exchange in trade37. This metal ~ mostly of bronze ~ finally developed into
the familiar round brass coin, with a square hole in the centre called cash. As the
Chinese had no pockets in the clothes they wore, the holes in the Chinese coins arose
from the need for stringing them together for preservation. The design on the coins
generally related to the Emperors name, his Province and the coins value.

Hammurabi, who reigned Babylonia for 42 years from 1792 to 1750 BC, reorganised
the administration of justice and established an orderly arrangement of written laws.
The Code of Hammurabi38 is one of the most important ancient codes of law yet
discovered39. The Code was based on earlier collections of Sumerian and Akkadian
regulations which amongst other things, included laws governing money and banking
operations. The temples and palaces of Mesopotamia served as safe places for the
storage of grain and later other goods including cattle, agricultural implements, and
precious metals. These deposits came to be used in settling debts and eventually private
banking houses were formed.

3.3 Coinage and Sovereignty

Coinage developed out of the practice of stamping blobs of electrum, a naturally

occurring amalgam of gold and silver, as an official guarantee of their purity. As the
skills of the metallurgists improved and these proto-coins became more regular in size
and purity the stamps became a guarantee of weight as well as purity ~ and hence of
value. By 640 BC the use of coins had spread across the Aegean Sea to mainland
Greece where the various city States took great pride in their own coinage, which was
first and foremost, a civic emblem. To strike coins with the badge of the city was to
proclaim ones political independence.

Religious power and State authority are synonymous with the matter of money. Even in
Biblical times this was demonstrated by the incident in which the Jewish Pharisees

Extant samples of Chinese coins date back perhaps 700 years before the Christian era.
The Code of Hammurabi consisted of 282 provisions systematically arranged under such headings as
family, labour, personal property, real estate, trade, and business. Legal actions were initiated under the
code by written pleadings; testimony was taken under oath; witnesses could be subpoenaed. The code was
guided by such principles as that the strong should not injure the weak and that punishment should fit the
crime. It was severe in its penalties, prescribing an eye for an eye, a tooth for a tooth. The legitimacy of
the code was maintained by invoking the authority of the gods and the State.
Johns, C.H. (1903) Babylonian and Assyrian Laws, Contracts, and Letters, re printed (1994) Gaunt Inc.
Publishers, Holmes Beach, Florida, USA.

attempted to discredit Jesus with the question Is it against our law to pay taxes to the
Roman Emperor or not? And Jesus retorted, Whose face is on the coin? After which
his questioners were forced to admit that the image and inscription on the coin was
indeed Caesars. To that Jesus replied Well then, pay the Emperor what belongs to the
Emperor and pay God what belongs to God 40.

Rome's first output of gold coinage was produced around 217 BC. An
innovation of the major currency reform of circa 211 BC was the
introduction of three gold denominations, with marks of value expressed
in terms of the new sextantal as (60, 40 and 20 sextantal). Like all issues
of gold under the Roman Republic, this coinage was intended to serve
only special military needs, and production was soon discontinued. The
types were the same for all three denominations and were of a suitably
military nature, with helmeted head of Mars, god of war, on obverse side
and an eagle clasping arrows on reverse. The prerogatives of the military
commanders in the field often included the right to strike coinage to meet
emergency expenses, which resulted in the large scale decentralisation of

3.4 Creative accounting ~ Roman style

The Romans had mastered the art of currency. During their 800 year empire, successive
rulers capitalised on the advantage of producing coin. Where once the value of a
precious metal was measured against its weight, the Romans creatively devised a
method of expanding the Treasurys wealth. In the conquest of empire building, every
time the Romans invaded another land they took control of the gold and silver mines.
They therefore had a monopoly on the commodity that was used for currency. The
Roman Treasury mixed cheaper metals in with the gold to bolster the quantity of coins
they could produce. Instead of using a kilo of gold to produce a kilo of coin of 240
sextantals value, the Treasury used one kilo of gold and a kilo of copper to make 2 kilos
of coin at 480 sextantals value. The new coins basically had only half the amount of
gold in them as the older coins had. Miraculously the new coins still had the same value
stamped on it. This meant that the Roman Treasury more or less doubled its quantity of
money by using metal technology and creative accounting. As the civilised world at the
time had faith in the Roman coins, their acceptance was readily approved for all forms

Book of Matthew 22 : 15-21 Good News version.

of trade. The result of this exercise allowed the Roman empire to finance its expansion
for hundreds of years based solely on its exclusive ability to produce money that had
purchasing power above its true value [~ which significantly, is exactly what we have
today with paper money]. Motivating men to take up the cause of plundering a distant
land was made possible by the incentive of financial gain. Had not these men been put
to work to promote the cause of the empire, they would have merely remained
unemployed, stayed in Rome and put on weight41.

3.5 The Anglo European experience

As economies developed money was used more and more for ordinary trade, but with
the demise of the Roman Empire, the monetary economy in early medieval Europe went
into a decline and barter re-emerged. During the 9th century AD however, the European
economy started to become monetised again. The re-emergence of coinage in the
Anglo-Saxon kingdoms of England was greatly stimulated by the Viking invasions and
the need to pay for war. King thelstan42, had no fewer than 30 mints in operation and
in order to keep control of them, the Statute of Greatley was passed in 928, stating that
there was to be only one single currency. England became the first major country of
Europe to attain a single national currency in the post-Roman era. However the renewed
incursions of the Danes interrupted and delayed this process until 1066.

Because of the convenience of royally authenticated coinage as a means of payment,

coins commonly carried a substantial premium over the value of their metallic content ~
more than enough to cover the costs of minting. Kings could turn this premium into
personal profit and hence the regular wholesale recall of coinage took place. These
recoinage cycles were far more frequent than were justified by wear and tear, but the
profits from minting supplemented the revenue that English monarchs raised from the
efficient systems of taxation introduced by the Normans. The profits made from minting
were one reason why governments jealously guarded their monopoly of coin
production. Because coins were made of precious metals, it was natural that they

A philosophy of Flavius Vespasian Caesar was to give the population bread and entertainment. It is
part of the reason why he built the Flavian amphitheatre ~ better known as the Colosseum ~ to entertain
the unemployed masses.
The grandson of Alfred the Great, thelstan succeeded his father, Edward the Elder, to the throne of
Wessex. He was the first English sovereign ever to be crowned on the Kings Stone at Kingston-upon-
Thames in 925. His fame stemmed from his conquests in Cornwall and Wales, and his defeat of a
combined force of Scots, Welsh and Vikings at the battle of Brunanburh in 938.

eventually circulated beyond the borders of the issuing State. Shortages of bullion
occasionally forced governments to swallow their pride and grant legal tender to foreign

3.6 What a Sterling idea

Steorling was the name of an ancient Norman coin, on which was embossed, a star
(steorra). The British pound [] can be traced back over 1,000 years to a point in history
when it equated to a pound [in weight] of Sterling silver. The Pound Sterling was an
obvious etymological morpheme in terminology. As the British pound became a
dominant international trading medium with a solid reputation, Sterling thus became a
term related to quality. By the early nineteenth century, Sterling did not necessarily
mean British coinage. It simply meant reliable, trustworthy money and referred to silver
and gold coinage of any origin, together with monetary instruments negotiable at face
value and ultimately backed by the British Treasury. The monetary instruments
included Treasury Bills and, by extension, government paymasters bills and
government store receipts. Thus the term Sterling could (and frequently did) include
instruments issued in dollars and rupees. In contrast, currency referred to privately
issued notes together with several commonly traded commodities such as grain.
Currency was considered less reliable than Sterling, probably with good reason.
Promissory notes were frequently discounted to some degree depending on the
reputation and worth of the issuer, and commodities tended to fluctuate in price, so a
bushel of wheat received one day might be worth considerably less a month later.

3.7 The Bishop

Bishop Nicholas Oresme43 was a medieval monetary scholar of considerable note who
established certain basic premises for the European monetary system. In the fourteenth
century, the Bishop wrote [in Latin], De Moneta , which discussed the basic

Nicole d Oresme (c. 1320 - 1382) was a French philosopher and churchman who became Bishop of
Lisieux in 1377. His writings dealt with law, politics, natural science, geometry and economics. He was
also an early advocate of the theory that the Earth revolved around other celestial bodies.
De Moneta (Of Money) has primarily been the object of attention among historians of economic
thought. Despite the fact that De Moneta contains technical economic analysis of the nature of money in
an Aristotelian mode, both the circumstances of its composition and the main lines of its argument
suggest that it deserves treatment as a profoundly political work. Oresmes intention is clearly to advise
his countrymen in a pragmatic fashion about a matter of public policy. His specialised economic analysis
is merely explanatory to his main point. In this sense, the political theory contained in De Moneta merits

parameters for a just and lawful monetary system. According to Oresme, money
could only be gold and silver coin, as it had always been in every society except those
of a primitive nature. The basic premises of Oresmes treatise were that the monarch
should coin the money, but he could not, without certain limited and just reasons, alter
the coin, change its form or name, change the ratio of exchange between the precious
metals, change the weight or material of the coins, or otherwise unjustly profit by any
method of changing the basic monetary unit of society. To do any of these, according to
Oresme, was an act of tyranny.

I am of opinion that the main and final cause why the prince pretends to the
power of altering the coinage is the profit or gain which he can get from it
Therefore, from the moment when the prince unjustly usurps this essentially
unjust privilege, it is impossible that he can justly take profit from it. Besides,
the amount of the princes profit is necessarily that of the communitys loss. But
whatever loss the prince inflicts on the community is injustice and the act of a
tyrant and not of a king And so the prince would be at length able to draw to
himself almost all the money or riches of his subjects and reduce them to
slavery. And this would be tyrannical, indeed true and absolute tyranny 45.

3.8 The coin of the realm

The timeless monetary maxims outlined by Oresme arose frequently in the framework
of the common law. There were many instances of English monarchs attempting to
violate Oresmes monetary principles but some monarchs actually agreed with them.
Examples of these endeavours quickly demonstrated the fallacy of any attempt to
debase the coin. During the reign of King Edward IV, he determined that England was
plagued by various impure coins of sundry weights and so perfected the standard of
coin of the realm ~ which produced excellent results. Subsequently during the reigns of
Henry VI and Henry VIII, these extravagant kings sought monetary gain by debasement
of the coin of the realm. These attempts produced adverse results not only for the nation
but for the monarchs themselves. In 1558 when Queen Elizabeth I succeeded her father,
Henry VIII, she restored Edwards ancient standard and thereafter during her reign
resisted the advice of her Ministers to engage in debasement. Her efforts at monetary
order produced very favourable results.

serious attention as an attempt to bring economic concerns to bear on the duties of rulers and the needs of
their subjects.
Oresme, N. (c. 1355) De Moneta, translated by Charles Johnson (1956), Thomas Nelson and Son Ltd,
London, pp 40 -48.

In 1625, after the death of King James I, Charles I assumed the throne and was faced
with a less than compliant Parliament. Needing money, Charles sought to engage in the
old fashioned method of coin debasement, but here he met stiff resistance.
In September 1626, Sir Robert Cotton46 addressed the Privy Council and expressed his
opposition to any attempt to debase the coin.

And wealth in every Kingdom is one of the essential Marks of their Greatness:
And that is best expressed in the Measure and Purity of their Monies. Hence was
it, that so long as the Roman Empire (a Pattern of best Government) held up
their Glory and Greatness, they ever maintained, with little or no change, the
Standard of their Coin. But after the loose times of Commodus had led in Need
by Excess, and so that Shift of Changing the Standard, the Majesty of that
Empire fell by degrees. And as Vopiscus saith, the steps by which that State
descended, were visibly known most by the gradual Alteration of their coin; and
there is no surer symptom of a Consumption in State, than the Corruption in

By 1691, there was a great debate concerning the alleged need to once again debase the
coin of the realm. Between 1691 and 1696, John Locke wrote several treatises against
the proposal. In these treatises, Locke made the following arguments.

For an ounce of silver, whether in pence, groats, or crownpieces, stivers, or

ducatoons, or in bullion, is, and always eternally will be, of equal value to any
other ounce of silver, under what stamp or denomination soever All then that
can be done in this great mystery of raising money, is only to alter the
denomination, and call that a crown now, which before, by the law, was but a
part of a crown The quantity of silver, that is in each piece, or species of coin,
being that which makes its real and intrinsic value, the due proportions of silver
ought to be kept in each species, according to the respective rate, set on each of
them by law. And when this is ever varied from, it is but a trick to serve some
present occasion, but is always with loss to the country where the trick is
played For it not being the denomination, but the quantity of silver, that gives
the value to any coin The royal authority gives the stamp, the law allows and
confirms the denomination, and both together give, as it were, the public faith,
as a security, that sums of money contracted for under such denominations shall
be of such a value Money is the measure of commerce, and of the rate of

In September 1626 Robert Cotton protested, on behalf of the London merchants, against the proposed
debasement of the coinage, and his arguments, which he wrote out in A Discourse touching Alteration of
Coyne chiefly led to the abandonment of the vicious scheme. Robert Cottons private library was one of
the most important collections of intellectual and political history. The collection was essentially a library
of manuscripts, possessing a monopoly of the most important material from early English history ~ so it
was with much authority that he spoke on such matters.

Cotton, Sir R. (1626) A discourse pronounced by Sir Robert Cotton... before the Lords of his majesties
most honourable privie councell at the councell table beinge thither called to deliver his opinion
touchinge the alteration of coyne... MS.(unidentified hand); [n.p., ca. 1640]7f.(13p.) Speech delivered 2 nd
September 1626. Published in Cottoni posthuma, (London, 1651). v.1, f.114-120.

every thing, and therefore ought to be kept (as all other measures) as steady and
invariable as may be

It is the interest of every country, that all the current money of it should be of
one and the same metal; that the several species should be of the same alloy, and
none of a baser mixture; and that the standard, once thus settled, should be
inviolably and immutably kept to perpetuity. For whenever that is altered, upon
what pretence soever, the public will lose by it48.

As a result of the debate concerning the proposal to debase coin, Parliament refused to
adopt it. Some 23 years later, Parliament enacted in January 1718, a resolution that
stated there shall not be any alteration made to the ancient coin standard of England.
One of the most significant expositions of the common law of England, and therefore
the heritage of Australian law, consists of Sir William Blackstones Commentaries on
the Laws of England. This will be discussed in detail in Chapter 5, when the thesis
examines the colonial period of Australian monetary policy.

3.9 Functions of Money

Money is one of the most important conceptions of humankind. Without it, a complex
modern economy, based on the multiple division of labour and the ubiquitous exchange
of goods and services, would be near impossible. Of course all that could change if the
world functioned on a purely cashless system ~ but alas that is not the case yet. As we
shall discover later, even if society was to function without hard cash ~ via an electronic
funds transfer payments system49 ~ we would still require an accounting system to
monitor our wealth, add our income and deduct our expenses. A monetary system
would still exist but only in a slightly different form to what we already have.

Because many things, including goats, grain, gold and paper, have been used as money,
it cannot be defined as some particular object, but must instead be defined by the
functions it serves. The classic function of money was as a medium of exchange in that
it allowed parties to do business without having to revert to a barter system. Another
function was to use it as a unit of account, here each party could discuss the value of an
item and know exactly how much they were going to receive or pay. Another use was as
a standard of deferred payment, in this situation parties could contract loan agreements

Locke, J. (1696) Some Considerations of the Consequences of Lowering the Interest, and Raising the
Value of Money, two excerpts printed in The History of Gold and Silver, Edited by Lawrence H White
(2000), Pickering and Chatto Publishers, Bloomsbury Way, London.
Commonly known as EFTPOS ~ Electronic Funds Transfer at Point Of Sale.

and be certain as to how much they would receive or need to pay at a point of time in
the future. Having wealth in the form of money meant that it also functioned as a store
of value, in this instant its value would remain in tact, unlike other commodities which
could either perish or die.

A medium of exchange is simply an item used to make it easy to exchange things. In

primitive economies people bartered goods and services. Direct barter is extremely
inefficient, it requires one person to locate someone else who wants exactly what the
first person has on offer ~ a double coincidence of wants needs to occur. As you can
imagine, in olden times when the choice was limited, this may not have been such a
problem, but in a modern economy with millions of products it would require an
extensive search to locate your ideal trading partner.

Another function of money is to serve as a standard of value or unit of account, so that

economic values in terms of quantifiable exactness can be measured. In this respect,
money serves as an abstract unit. This standard of value function is overwhelmingly
important because a modern economy requires numerous comparisons between the
valuations of competing goods. In principle, this unit of account need not be the same as
the medium of exchange. In colonial Australia, for example, merchants kept their
financial records in British pounds, but most of the transactions took place in Spanish
dollars. Obviously, however, it is convenient to use the same item both as a medium of
exchange and as a unit of account, and modern money normally fulfils this role.

As a store of wealth, money has certain peculiarities. Unlike other forms of wealth, it
has no transactions costs. Someone who decides to hold wealth in, for example,
corporate stock has to undergo a certain amount of trouble and cost ~ first to buy stock
and then to sell it again in order to buy another item. All of these costs and
inconveniences can be avoided by holding ones wealth in the form of money.
Economists term the ease of using monetary wealth as liquidity.

While the four concepts outlined above have been the traditional functions of money,
the changing pace of the world demands that money can now perform many more tasks.
Without throwing the economics fraternity on its head, the author would also suggest
that money can also be used as an incentive to get people to work, a political tool to

implement certain policies and build national infrastructure and finally as a modem of
wealth creation through investment and speculation.

3.10 Different types of money

What items should be counted as money in the Australian economy? It is clear that one
component of money is currency. But the definition of money must include more than
just currency. The great bulk of dollar value payments is made by transferring bank
deposits and not by currency. Currency is merely the small change of the financial
system, money must therefore have several forms.

It is necessary to classify money into it various types. One is full-bodied commodity

money ~ money that has a value as a commodity ~ gold or silver, for instance, fully
proportional to its value in weight with other commodities. Secondly, because money
can be awkward to carry, representative full-bodied money was developed ~ this
consisted of paper money that was freely convertible into full-bodied money. During the
rise of the British Empire, it became convenient to issue Bank Notes to merchants rather
than handing over hundreds of pounds of Sterling silver. The merchant if he so desired,
could collect the silver from whence the Note was issued. In the late nineteenth and
early twentieth centuries most Western countries based their currencies on gold.
Currency notes could be exchanged for gold at the respective Treasury. Another type of
money is fiat money. Fiat money is an intrinsically worthless or almost worthless
commodity that serves the function of being an accepted medium of exchange.
Example; paper with pictures and numbers printed on it. The value of fiat money is not
linked to any amount of gold or silver held at a nations central bank. It is accepted as a
medium of exchange purely by its convenience and by the faith that a population puts in
it. All Australian money is fiat money ~ ie money that does not have a value as a
commodity equal to its face value and that cannot be exchanged for full-bodied
commodity money at the Treasury. Obviously, cheque accounts must also be included
in the definition of money as are bank bonds and government securities.

Beyond these basic definitions, however, there is disagreement. Some economists prefer
to define money by its essence ~ it is a medium of exchange and is liquid. According to
this criterion, money is narrowly defined as currency plus cheque account deposits.
Nobel Prize winning economist, Milton Friedman preferred a broader approach.

Economists and policymakers are primarily interested in the supply of money because
changes in the supply of money bring about changes in prices and in output ~ and hence
in national income. Friedman therefore defined money as that totality which offers the
best explanation and predictability of changes in income. In addition to this, he believed
that the totality should be subject to government control, because policymakers not only
want to predict income but may also want to change it to promote alternative economic
conditions ~ for instant speed up economic activity if the economy is moving toward
recession or slow down the economy if the economy is heading towards a boom or
expansionary phase.

So this brings us up to date. Money is a totality by which governments are able to

control the economic welfare of a country. The term given to this phenomenon is
monetary policy.

3.11 A modern definition of monetary policy

Monetary policy is action by the RBA to induce changes in the money supply by
changing interest rates for the purpose of stimulating the economy during recession and
conversely, to restrain economic activity during periods of expansion. Monetary policy
is often contrasted to fiscal policy, which affects the economy through taxation and
government expenditures. Monetary policy is also contrast with income policy, which
attempts to influence the economy through wage and price guidelines. Because
Australia has adopted the monetary policy approach to controlling the economy, this
thesis will not expand on either fiscal or income policy. The thesis will however
investigate monetary policy in significant detail in Chapter 7 when the current legal
system is analysed.

Chapter 4

Hans Kelsen: the man and his work

4.1 Introducing Hans Kelsen

Hans Kelsen was an Austrian jurist who gained international notoriety as a legal
positivist philosopher, who for the major part of the twentieth century contributed
significantly to the legal understanding of the sovereign State and its place within the
international setting. The first part of this chapter draws information from his biography
written by his former student and assistant Rudolf Aladr Mtall50, as well as the
writings of Nicoletta Bersier Ladavac51 in her biography. The second part of this
chapter analyses a minute portion of his prodigious work and applies his philosophy to
the Australian experience.

4.2 The life of Hans Kelsen

Hans Kelsen was born in Prague, Czechoslovakia in October 1881. At the age of three,
his family of German-speaking Jewish and middle-class origins, moved to Vienna
where Kelsen pursued his academic studies. In 1906 he was awarded a doctorate in law
~ even though his lifelong interests were largely concentrated in the humanistic and
classical fields of philosophy, literature and logic. His passion for knowledge in these
areas however clearly exercised an important influence on much of his work throughout
his life.

The year 1919 was particularly important for Kelsen. Not only did he secure a
significant advance in his academic career as the founder and editor of the Journal of
Public Law 52, but he also became an important personality in the history of his country
as he was entrusted with the task of drafting the new Austrian Constitution.

Mtall, R.A. (1969) Hans Kelsen, Leben und Werk, [Life and Work], Deuticke, Vienna.
Ladavac, N. B. (1996) Biography of Hans Kelsen (1881 - 1973), European Journal of International
Law, Volume 9, Issue 2: 1998.
23 volumes running to 1924.

In the interwar period Kelsens activities were received in a positive manner. With
regard to his purely legal scientific activities, this was the most productive period of his
life. Kelsen was now at the height of his career and he proceeded to use that power to
elaborate the ideas which he had outlined in his previous works into a complete theory
of norms. The formal theory of the nature of legal norms and the relationships which
existed among them that had been first presented in 1911 was to receive major new
components in the form of contributions from Kelsens former students, Adolf Merkl
and Alfred Verdross. Merkl elaborated on the specific superiority structure that such a
normative order must necessarily possess. And Verdross was able to point out with
precision the manner in which the existence of a fundamental norm, ~ labelled as
Grundnorm ~ that confirmed the authority of a system of norms ~ must be assumed to
exist if a system of positive law was to be analysed as a coherent whole. Armed with
these contributions and relying on insights drawn from a wide range of philosophical
literature, Kelsen proceeded to elaborate the mature version of his theory of law ~
published for the first time in 1920 as Reine Rechtslehre (Pure Theory of Law 53 ).

The high positions which Hans Kelsen had achieved in administrative and academic life
by the end of WW1 led Karl Renner to entrust him with the task of directing the
technical drafting of the new Austrian Federal Constitution. Kelsens contributions to
the Constitution concerned matters of form rather than content54. Taking the materials
which were presented to him, he proceeded to arrange them in such a manner that
special emphasis was placed upon the democratic principles which the Constitution was
required to possess. The various institutions that were to be coordinated and controlled
by the Constitution were arranged consenting to the dictates of the pure hierarchical
form ~ which according to Kelsen all legal orders necessarily possessed. The
democratic legislature was to be paramount in this hierarchy and its authority remained
unchallenged by that of any other organ. Since being adopted in 1920, the Austrian
Constitution has remained virtually unchanged in its fundamental principles to this day.

Once established, the democratic form of the State was to be preserved by a process of
legal self-regulation ~ functioning according to the principle of Rechsstaatlichkeit [the
rule of law] which had preoccupied Austrian Liberals during most of the course of the

Hans Kelsen expanded on his Pure Theory of Law in 1934 with a more universally accepted version.
The actual provisions were determined by a process of political decision making over which Kelsen
had no control.

nineteenth century. For Kelsen the self-regulating character of the Constitution was a
product of its hierarchical form. This hierarchical ordering of public institutions created
by it, meant that the actions of any particular organ of the State were clearly
circumscribed by the organ immediately preceding it, with the democratic legislature
being the ultimate determinant of all actions of the State. The determination of whether
or not a particular organ had overstepped the boundaries of the field of activity that had
been assigned to it, was to be decided by a new organ called the Constitutional Court. It
was actually somewhat similar to the old Riechsgericht ~ that being the Supreme Court
system of the Habsburg Empire55 but with new improved functions.

On the basis of his role as constitutional draftsman and his position as Professor of
Constitutional Law, Kelsen was appointed to a seat on the newly created Constitutional
Court where he exercised a strong influence over its rulings on many occasions. He was
however, dismissed from the Court in 1930 for political reasons 56. The political attacks
on Kelsen were so vehement, that as a result of this major controversy he decided to
move to Cologne in West Germany. There he taught international law at the university,
focusing in particular on a new area ~ positive international law and the concept of

The beginning of the Second World War motivated Kelsen to leave in 1940 with his
family for the United States of America. Just on 60 years of age, with a poor knowledge
of English and with no certainty regarding his career or his future, Kelsen embarked on
yet another adventure in a new country. In 1942, he became visiting professor at
Berkeley University in California, in the Department of Political Science. In 1945 he
became legal adviser to the United Nations War Crimes Commission in Washington,
with the task of preparing the legal and technical aspects of the Nuremberg trials 57. For
the period 1945-1952 he was appointed full professor at Berkeley where he finally
found a calm environment conducive to his intense and productive activities. Here he
largely focused on teaching international law. The themes covered in his lectures
included the origins of legal institutions, collective and individual responsibility, the

The Habsburgs were the most prominent European dynasty from the fifteenth to the twentieth centuries
and ruled Austria and Hungary as emperors up until the end of World War I.
Kelsen was of Jewish descent and prior to the beginning of World War II suffered increasing personal
attacks from the rising anti-Semitist movement.
The Charter of the International Military Tribunal (the Nuremberg Charter) authorised the military
trials of post World War II.

principle of sovereign equality, and a comparison of the Covenant of the League of
Nations with the Charter of the United Nations.

During this period Kelsen also devoted considerable attention to issues relating to the
maintenance of peace and international cooperation, especially in relation to the Charter
of the United Nations. He wrote several studies on the Security Council, examining
questions of membership, the organisation, legal status and sanction powers of the
organisation. This research culminated in the publication of The Law of the United
Nations in 1950. Kelsen remained highly active and productive, even after his
retirement. In 1952 he published his culminating work, Principles of International Law,
studying the most important aspects of international law, including the creation and
application of international law, the essential function of international law, international
offences, sanctions and reprisals, the spheres of validity and national compliance.

Hans Kelsen died in Berkeley in April 1973 at the age of 91 years. He left behind him
almost 400 works ~ a legacy of an immensely productive life. Several of these works
have been translated into as many as 24 languages. In 1971, to celebrate his ninetieth
birthday, the Austrian Government founded the Hans Kelsen Institute in Vienna, which
houses most of his original writings.

4.3 Kelsen and the law

Law can be defined broadly as a system of standards and rules of civil society, ie;
standards of human conduct that impose obligations and grant corresponding rights, and
institutional rules regarding the ascertainment, creation, modification, and enforcement
of these standards. The question What is law? has provoked innumerable answers
throughout human history, ranging from natural law via the Old Testaments assertion
of law as the will of God through to the thesis of legal realism where positive and
descriptive law is defined by men.

The difference between natural-law jurists and legal positivists was that the former
insisted on a necessary connection between moral value and legal validity [where
certain moral principles with which man-made law had to comply with if it was to be
held valid] whereas legal positivists ~ of which Kelsen was one ~ contended that it was

not necessary that laws reproduce or satisfy certain demands of morality [despite the
fact that they often did58 ].

Traditionally, law has been divided into public law and private law. Public and private
laws that set forth the substance of rights and obligations are called substantive law.
Substantive law pertains to what the law is on a given matter as distinguish from legal
procedure which specifies the methods to be followed in adjudicating substantive law
cases. Legal procedure is employed to ensure disputes or cases are conducted in a
manner protective of the rights of the participants and sets out how the rights and duties
of substantive law are to be vindicated.

Laws can be divided on the basis of the sources of law from which they derive. The
various legal systems of the world recognise law as being valid and therefore binding on
their subjects. The following list describes some of major sources of law; constitutions
and administrative rules; legislative statutes; judicial precedents; and customary
practice. Customary practice, is the primary source of law in tribal systems, which is
interwoven with kinship, taboo, religion, and traditional authority. Judicial precedents ~
known as case law ~ are prior cases decided by courts which are recognised as valid law
that later courts must follow in common law jurisdictions. Today when we think of law,
the concept of statutes comes most readily to mind. However statutes are now
outnumbered by the innumerable administrative rules and regulations that have
accompanied the growth of administrative government. Here every rule of law obligates
human beings to observe certain behaviour under certain circumstances. However
according to Kelsen:

Rules of law refer only to human behaviour; they state how men ought to
behave, and say nothing about the actual behaviour of men and of the cause
thereof. In order to prevent misunderstandings (as to the nature of law), it is
therefore better in this context not to use the term rule, but to characterise law
as norms 59.

Hart, H.L.A. (1961) The Concept of Law, Clarendon Press, Oxford.
Kelsen, H. (1944) General Theory of Law and State, translated by Andres Wedberg, Russell & Russell,
New York, p 37.

4.4 Defining the grundnorm

The Pure Theory of Law was Kelsens legal theory, that conceptualised law as an
apparatus and highlighted the role of basic assumptions in law. What distinguished
Kelsens positivism from other types of legal positivism was his expansive
interpretation of the grundnorm or basic norm ~ which became the foundation of his
theoretical work. Kelsen was intent on reconstructing the law as a closed, coherent and
dynamic system of ordered, binding norms. In order to achieve this, he was forced to
reach beyond the positive-law system and appealed to a supra-legal, non positive norm
called the grundnorm. The word grundnorm is one in the same as the basic norm.
Grundnorm is the German word Kelsen used when he wrote his theory in 1920. Its pure
translation into English is ground norm but that expression did not convey the intended
meaning so basic norm was adopted instead.

Before we proceed any further it is necessary to clarify the common everyday meaning
of these words. It must be remembered that Kelsen wrote his theory in German so there
remains the possibility that some culture specific idiosyncrasy may have been lost in the
translation. German and English are remarkably similar as languages, yet still have their
uniqueness. Basic and Norm are common to both languages, however Grund is specific
to German.

The meaning of each word is as such:

Word Deutsch 60 English 61

Basic basis / base base

foundation fundamental
bottom simplest/lowest level

Norm qualifying standard standard pattern

or target/objective regular type
specification customary behaviour

Grund ground /dirt ground /dirt

base earth
fundamental beginning

The Concise Oxford - Duden German Dictionary, Oxford University Press Inc., New York.
The Concise Oxford Australian Dictionary, Oxford University Press, Melbourne, Australia.

It can be observed that there is a subtle difference between each language which [in the
authors view] may lead to a significant distortion in the communicated message.
Kelsens own interpretation of the word norm is:

The word norm comes from the Latin norma, and has been adopted in
German to refer primarily, though not exclusively, to a command, a
prescription, an order. Nevertheless commanding is not the only function
of norms: norms also empower, permit, and derogate 62.

With Kelsens interpretation, the meaning of norm has thus expanded into the legal
dimension, where it now assumes an identity of a rule making character. The pure
English translation looses meaning but if we apply Kelsens interpretation, that
dimension broadens to the legal ground-ing or validity of the basic norm. The best
translation of Kelsens interpretation of grundnorm is therefore, the valid founding
reality of commanding rules which is expressed in English legal theory as simply the
basic norm.

4.5 The validity of law

To consider legal rules as valid, was an indication that these rules possessed a certain
quality. This quality could be ascertained or established in different ways by applying
different criteria for validity. Whether or not legal rules were considered as valid had to
do with the criteria or principals according to which the valid law was identified. To
explain this, we can identify valid law by investigating the origin or source of the rules
in question, or also by means of defining what in a particular system, at a given time,
counts as valid law.

Validity can be used and understood in different senses. A legal rule can be valid
descriptively or normatively. First, a legal rule can be valid in the sense of being
binding or having binding force, which means that the rule purports to establish an
obligation for a person to obey the norm in question. This concept of validity is
normative in that the norm ought to be observed and applied because it is justified.
Second, a legal rule can be valid in the sense of belonging to a given legal system. This
concept of validity is descriptive in so far as it expresses a certain relationship that
exists between individual rules and the legal system ~ a membership as such. Third, a

Kelsen, H (1973) The General Theory of Norms, published posthumously in 1979 in German under the
title Allgemeine Theorie der Normen, by MANZ verlag Wein, translated by Michael Hartney (1991)
Oxford University Press, New York, p 1.

legal rule can be valid in the sense of being applicable. In this sense there is a previous
superior rule which implies that it ought to be observed and would therefore be binding.
This concept of validity is applicable in that it informs us about the existence of another
norm that applies to the validity of the latter norm.

Kelsen embraced the normative concept of validity. In Kelsens view, the validity of
legal norms was conditioned by two things, first by their having been posited (ie issued
or created) according to another previous and more general norm and second by the fact
that the legal system to which the norms belonged was ~ by and large ~ effective.
When asserting that a particular legal rule was valid, it did not imply any kind of moral
evaluation but it did imply a conformity by the individual to obey the posited rule.

Kelsen then expanded upon this notion by viewing law as a unified system of binding
norms. According to Kelsen, it was necessary to presuppose a grundnorm in order to
bridge the gap between the is and the ought in order to understand law as a system of
binding legal norms governed by a single norm-issuing authority. By this
presupposition, Kelsen claimed, jurists could do no more than identify the basis upon
which their argument was grounded, and via the doctrine of the basic norm he advanced
plausible arguments for a source of normativity ~ that reinforced the unified system of

In this context, presupposing the grundnorm was adequate in so far as it marked the
specific and descriptive-normative nature of law ~ where the very act of presupposing
could be understood as the source of all normative and positive law. This interpretation
addressed the issue of the formal legitimacy of all subsequent laws and rules in the
national setting.

Since norms regulate human behaviour, and human behaviour takes place in
time and space, norms are valid for a certain time and for a certain space. The
validity of a norm may begin at one moment and end at anotherIn order to be
valid at all, it must be valid, not only for a certain time, but also for a certain
territoryWe may therefore speak of the temporal and territorial sphere of
validity of a norm. To determine how men have to behave, one must determine
when and where they have to behave in a prescribed manner 63.

Kelsen, H. (1944) General Theory of Law and State, translated by Andres Wedberg, Russell & Russell,
New York, p 42.

4.6 The grundnorm of the State

The grundnorm of a legal system was a norm that was conceptually presupposed in
legal argument and as such had to be understood as the ultimate grounding of the
validity of the entire system. Kelsens grundnorm asserts that the primary positive
norm of a legal system ~ the norm of the Constitution ~ is valid and binding and
therefore ought to be observed. Once the Constitution is perceived as valid and binding,
all the norms that can be traced back to it must also be perceived as valid and binding.

Since the State is here understood as a legal order, the problem of the
constitution finds its natural place in the general theory of lawThe
constitution of the State, usually characterised as its fundamental law is the
basis of the national legal orderit sometimes appears desirable to give it a
more stable character than ordinary laws. Hence, a change in the constitution is
made more difficult than the enactment or amendment of ordinary lawsThe
original constitution of a State is the work of the founders of the State. If the
State is created in a democratic way, the first constitution originates in a
constituent assembly64

A Constitution has to define the main organs and the different branches of government.
A Constitution is also meant to be a stable framework for political and legal institutions.
Furthermore, a Constitution is usually the superior law of the land and contains judicial
procedures whereby compatibility of laws and other acts can be tested and be declared
either valid or invalid. The Constitution also needs to be entrenched in the populations
mind and express a common ideology of nationhood.

As a matter of fact, the constitution, in the formal sense of the word, contains the
most diverse elements besides the norms that are constitutional in a material
sense. At the same time, there are constitutional norms (in a material sense)
which do not appear in the specific form of the constitutionA traditional part
of the instruments called constitutions is a solemn introduction, a so called
preamble, expressing the political, moral, and religious ideas which the
constitution is intended to promote. This preamble usually does not stipulate any
definite norms for human behaviour and thus lacks legally relevant contents. It
has an ideological rather than juristic characterThe preamble serves to give
the constitution a greater dignity and thus a heightened efficacy 65.

Constitutional theory is however not only descriptive but also has a dual character of
being both positive and normative. It is partly a description of how a society is
constituted and partly a normative proposition of how things ought to be. Recalling

Ibid. p 258 - 259.
Ibid. p 260 - 261.

Albert Diceys explanation [in section 2.4 page 11 of this thesis] of the rule of law as an
expression that the Constitution is not the source of valid law, but the consequence of
the rights of individuals, helps us to clarify the normative aspect of a Constitution. Its
normative aspect involves requirements as to the material content of law, i.e. how to
uphold and promote individual rights.

The legal validity of the actions of the State depend upon adherence to the form of the
Constitution. Reliance upon this sort of pure formalism as the foundation of political
life has one further implication. The combination of radical democracy with the
commitment to control all actions of the State, and the settlement of all political
disputes, by the means of clearly defined legal procedures, assumed that the democratic
electorate had reached the level of rational responsibility.

The fundamental presupposition of the Constitution as Kelsen viewed it, was thus the
existence of that rational responsibility which was required to sustain a large
multinational empire. Kelsens attitude on this point is to some extent optimistic in that
he gives the voting constituents of society, decision making authority beyond that of
their limited qualifications. It implies that the average voter can make credible
judgements even though they may not be adequately informed or experienced on the
matters on which they have to vote. To this extent, it becomes necessary to create
organs or institutions within the State that can act in a manner that is for the benefit of
the constituents, but allowed to operate independent from their control. Being aware of
the possibility of pious fraud being committed, it then requires a form of accountability
to be implemented.

all the powers entrusted to government, whether State or National, are divided
into three grand departments, the executive, the legislature and the judiciary.
That the functions appropriate to each of these branches of government shall be
vested in a separate body of public servants, and that the perfection of the
system requires that the lines which separate and divide these departments shall
be broadly and clearly defined. It is also essential to the successful working of
this system that the persons intrusted with power in any one of these branches
shall not be permitted to encroach upon the powers confided to the others, but
that each shall by law of its creation be limited to the exercise of the powers
appropriate to its own department and no other 66.

Ibid. p 269, Kelsen citing Kilbourn v Thompson, 103 U.S. 168, 19 of (1880).

4.7 Kelsen applied to Australian sovereignty

It may be noted with some familiarity that these checks and balances were incorporated
into the Australian Constitution via the mechanism of the Separation of Powers doctrine
as previously discussed in Chapter 2. At this point, it is worth considering how the norm
of monetary policy responsibility, by the Government, can be delegated to the RBA.
The source of validity for that act, must therefore be established. But before that task is
endeavoured the next section will clarify Kelsens philosophy to the Australian

The prevailing paradigm of sovereignty in the modern constitutional monarchy is

ideally demonstrated in the Australian context by examining the views of Andrew
Inglis-Clark ~ one of the framers of Australias own Constitution. Andrew Inglis-Clark
represented Tasmania at the Australasian Federation Conference in Melbourne in 1890,
where he attested to Tasmanias readiness to move towards nationhood. He played a
prominent part in the formulation of the first draft of what ultimately became the
Australian Constitution. Drawing heavily from the US Constitution, Inglis-Clarks
notion of sovereignty for the Australian people also presumed a common citizenship
between the Commonwealth and the State, stressing that it was the people who were the
holders of ultimate sovereignty67.

Inglis-Clarks method of interpreting the Constitution was characterised by recognising

that the Constitution was not made to serve a temporary and restricted purpose, but was
framed and adopted as a permanent and comprehensive code of law, by which the
exercise of the governmental powers conferred by the Constitution, should be regulated.
The Constitution, he argued, must be applied by declaring the will and the intentions of
the present custodians and possesses of sovereign power ~ for it is they who enforce the
provisions of the Constitution and make it a living force.

Clark, A.I. (1901) Studies in Australian Constitutional Law, Reprinted in 1997 by Legal Books,
Prospect Media Pty Ltd, St Leonards, NSW.

Garran, R. Quick, J. (1901)The Annotated Constitution of the Australian Commonwealth, Reprinted in

1976 by Legal Books, H. Clark Pty Ltd, Marrickville, NSW.

Moore, W. H. (1910) The Constitution of the Commonwealth of Australia, Charles F. Maxwell (G.
Partridge & Co.) Little Collins Street, Melbourne.

Applying Kelsens theory with that of Inglis-Clarks interpretation, Australian
sovereignty must therefore look like this:

4. 8 Figure 1.
Conspectus of Australia's Constitution
Sovereignty rests with the voters of the states
acting through their elected representatives

The Constitution of the

Commonwealth of Australia

State Governments Written and Unwritten Mode of amending Federal

Electors organized Rights of citizens the Government
within State and States Constitution
Constitutions Liberties & Immunities

State Constitutions National Legisature National Executive National Judiciary

through Parliament The Prime Minister The High Court
and Cabinet

State Executive State Legislature State Judiciary Senate & Ministerial Lower Courts
House of Representatives Administration

Local Laws. National Government

Municipal Legislation Departments
Government eg.
the RBA

Note Printing Australia

a fully owned
subsidiary of
the RBA

On the inauguration of the Commonwealth in January 1901, British hegemony over the
Australian colonies ended and the Commonwealth of Australia emerged as an
independent sovereign nation. The authority for the Australian Constitution then and
now is its acceptance by the Australian people68. Kelsen suggests that we are prepared
to abide by the written and unwritten words of the Constitution because no one ever
questions it. Lawyers never ask whether the Constitution is valid they simply assume
that the Constitution is binding69. It is because society accepts it as binding that we
follow its doctrine. If society is dissatisfied with the status quo it can change it70
because ultimately ~ Australian sovereignty lies with the people, who live under the
valid founding reality of commanding rules imbedded within its Constitution.

Advanced by the late Justice Lionel Murphy, in Kirmani v Captain Cook Cruises Pty Ltd [No 1] (1985)
159 CLR 351.
Blackshield, T. & Williams, G. (1998) Australian Constitutional Law and Theory, The Federation
Press, Leichhardt, NSW, p 8.
The Constitution, however, is not just another statute, which can be changed by the legislature if it
proves, under judicial interpretation, to yield absurd results. It was a compact which was deliberately
designed to be difficult to change. The 1890 constitutional debates make this clear. Specifically, it could
be changed only if the Federal Government put a referendum to the people, which was supported by a
national majority and by a majority of voters in the majority of States. See section 128 of the Australian

Chapter 5

Money in Australia

5.1 Colonisation

Following the United States Declaration of Independence in 1776 and its subsequent
victory, Britain needed to establish an alternative destination to take the population of
its overcrowded prisons. The eminent scientist Sir Joseph Banks, who had accompanied
Captain James Cook on his 1770 voyage, recommended Botany Bay as a suitable
destination. In 1787 the First Fleet of 11 ships71 and about 135072 people under the
command of Captain Arthur Phillip set sail for Botany Bay. On arrival, Botany Bay was
considered unsuitable and on 26th January 1788 a flag raising ceremony was held further
North in a newly discovered well-protected harbour. Captain Phillip named the
settlement after Baron Sydney the British Home Secretary. The new settlement was
formally proclaimed as the Colony of New South Wales on 7th February 1788.

Thus the British acquisition of New Holland began with a troupe of petty criminals, an
assemblage of second-rate soldiers and a crew of ancient mariners. While the settlers
were reasonably well equipped, little consideration had been given as to the skills
required to make the colony self-supporting. Few convicts had farming or trade
experience and the lack of knowledge regarding the countrys seasonal patterns saw
initial attempts at farming fail. The colony nearly starved, and Phillip was forced to
send a ship to Batavia in the Dutch East Indies73 for supplies. More relief arrived with
the Second Fleet in 1790, but life was extremely hard for the first few years of the
colony. Until such a time as self-sufficiency was realised, all rations were to be
provided by the British Government through the government store. In 1790 James Ruse,
a convict, had begun to successfully farm near Parramatta and was soon joined by
others. The colony began to grow enough food to support itself and the standard of

HMS Supply, carrying Captain Arthur Phillip arrived in Botany Bay on the 18 th January 1778. The other
ten ships in order of arrival were; Alexander, Scarborough, Friendship, HMS Sirius, Lady Penrhyn,
Charlotte, Prince of Wales, Fishburn, Golden Grove and Borrowdale.
Fidlon, P. & Ryan, R. (1981) The First Fleeters, Australian Documents Library Pty Ltd, Sydney, p3.
Now Indonesia.

living for the residents gradually improved. However the colony remained under the
strict control of the Governor and resources remained the property of the Crown and
were subsequently redistributed according to highest priorities.

Although some coins probably came in the pockets of the officers and soldiers, the
settlement was viewed strictly as a penal colony and the Crown saw no need to make
provisions for a monetary system. There was therefore no local medium of exchange.
Salaries of government employees were paid by government bills drawn on the English
Treasury and redeemable in cash only after the employees returned to England.
Whereas military salaries were drawn against the Admiralty by the New South Wales
Corps paymaster, civil expenditure was the Governors responsibility.

5.2 Governor Arthur Phillips monetary policy

Governor Phillip was given two directives with respect to expenditure74. The first was
that he should purchase supplies and livestock en route, paying by means of bills drawn
on the Lords of the Treasury and the second; was that all public expenditure should be
financed by warrant, issued by Phillip himself as he saw fit. The first expenditure
Phillip incurred in the new colony was the need to pay carpenters and sawyers from
HMS Sirius and Supply for work done on shore. These accounts were settled in small
Treasury bills, but the money against which government bills were drawn was all held
in England. Thus while bills of exchange existed within the colony and swapped hands
on a regular basis, coinage was virtually non-existent. As the reward for effort could
only be paid for by way of Treasury bills or barter exchange, the lack of cash in
circulation had the devastating effect of limiting enterprise.

As early as November 1788 Governor Phillip recognised this difficulty and requested a
remittance of cash money from England. From an historical perspective Phillips action
in making the request would have to be regarded as Australias first formal act of
monetary policy. But remembering that this message would take eight months to get to
England by ship, it is understandable that a solution would not be prompt. Four years
later in November 1792, the Kitty arrived at the colony with almost 4500 Spanish

Butlin, S. J. (1953) Foundations of the Australian Monetary System 1788-1851, (reprinted 1968)
Sydney University Press, Sydney. Quoting Phillips instructions dated 25 th April1787.

dollars (equating to 100075). This money was for the New South Wales Treasury to be
spent by Phillip at his discretion. The Spanish dollar was regarded as an international
medium of exchange at the time and formed the principal currency of many colonies
around the world regardless of nationality.

By 1800 Governor Phillips first instalment of 4500 dollars had almost disappeared. As
the New South Wales colony was a net importer, the dollars slowly left the colonys
circulation to pay for goods purchased from visiting ships. Although there was a net
drain of Spanish dollars from the colony, the visiting ships left behind a variety of
foreign coins76 as change to private merchants and government purchases. The trouble
with this was that there was no general agreement on the relative values of the various
coins in circulation. For example, while foreign coins exacerbated the problem, some
merchants accepted Spanish dollars at 4 shillings 6 pence, some at 4 shillings 8 pence,
and others at 5 shillings.

5.3 Governor Philip Kings monetary policy

In September 1800 Captain Philip King took over from Governor John Hunter77. King
had arrived in the colony five months earlier and was well acquainted with the
administration of the colony by the time he took office. On the 6th November 1800, the

Before 1966 Australia used a monetary system directly inherited from Britain. The principal currency
unit was the pound () which was divided into twenty shillings each comprising 12 pence. Monetary
amounts less than a shilling were expressed with the suffix (d) so that threepence would be written 3d and
fivepence halfpenny would be written 5d. For larger amounts, the denominations were separated by
virgules or slashes. Fifteen and six (meaning fifteen shillings and six pence) was written as 15/6 but
amounts comprising even shillings had a dash in place of the zero so one shilling was written as 1/-
rather than 1/0. The principle was extended to larger amounts. For example, Six pounds four and
twopence halfpenny was written as 6/4/2, one pound ten [shillings] as 1/10/- and Ten pounds as
10/-/- or simply 10. Finally, two pounds and tenpence would be written as 2/-/10 and rarely, if ever,
as 2/0/10.
In addition to British coinage, there were guilders and ducats from Holland, rupees and pagodas from
India and several other coins as well as a few English and Irish banknotes. The total amount was small
and the coins tended to be exported quickly as they were often the sole means available to individuals to
purchase goods from visiting ships.
Captain John Hunter was appointed Governor succeeding Arthur Phillip on 6 th February 1794.

Porpoise having been sent from England arrived at Port Jackson carrying 4 ton78 of
copper coins. This second act of monetary policy equated to an injection of 150 into
the colonial monetary system.

The confusion of multiple currencies in circulation was readily apparent to King.

Having held the office of Governor for only a few weeks he attempted to rationalise the
situation by issuing a proclamation on the 19th November 1800. The preamble to the
proclamation read:

Whereas representations of the want of small money experienced here

have induced His Majesty to take into His gracious consideration the
immediate relief from this great inconvenience to all classes of his
subjects in this colony, the quantity of copper coin has been received
from His Majestys armed vessel Porpoise and Royal Admiral, and will
be circulated by being paid for grain and animal food supplied to His
Majestys stores. . This supply of copper coin having been sent to
relieve the inconvenience of persons requiring to make small payments,
no persons are to collect the same for the purpose of making large
payments, nor shall it be deemed a legal tender to offer the same in
payment for any sum exceeding five pounds 79.

The second theme of the proclamation and by far the more important one, was perhaps
Australias third experience with monetary policy. Governor King fixed the value of the
various foreign coins in circulation in terms of British money. He did this in a
somewhat bias manner in order to be beneficial to the colony by inflating the value of
British money. The idea was that whereas a single 1 oz copper coin was normally worth
a penny, its purchasing power was to be that of two pence, equating to a 100 per cent
increase in value. At the top end of the scale, a guinea that would normally be valued at
1/1/, would now be increased to 1/2/ equating to an increase in value of almost 5 per
cent80. It was assumed, that an itinerant trader would be unwilling to accept a guinea as

This was an imperial ton, not a metric tonne. An imperial ton equated to 20 hundred weight (cwt).
Each hundred weight equalled 112 pounds (lbs). There were 2240 pounds or 35,840 ounces (oz) to the
ton. 1 penny equalled 1 oz of copper.
Pitt, I. (editor), (2000) Renniks Australian Coin and Banknote Values, (19th edition), Renniks
Publications, Sydney. It is important to understand the coinage in circulation in 1800 and subsequent
years was not limited to what was explicitly mentioned in Governor Kings proclamation. It is
understood that there were threepences and sixpences, half mohurs, half-guineas, third-guineas as well as
Spanish doubloons in circulation within the colony.
Note that the over-valuation of the coinage was most apparent in the smaller denominations. Whereas a
guinea gained less than 5 per cent, a shilling gained over 8 per cent and a penny gained 100 per cent.

payment for 1/2/- worth of merchandise and therefore not do business thus keeping the
desired currency in circulation within the colony. Regardless of best intentions in mind,
Governor King overlooked the probability that the trader would simply increase the sale
price of his merchandise in order to receive its true value and hence still place a net
drain on the cash in circulation.

To ensure that no one could plead ignorance of the rate or legality of the coins
circulating in the colony, Governor King judged it most expedient to publish the
following table with the rate affixed to each coin.

Table of specie s. d.
A guinea 1 2 0
A half-Johanna 2 0 0
A gold mohur 1 17 0
A Spanish dollar 0 5 0
A Johanna 4 0 0
A ducat 0 9 6
A rupee 0 2 6
A Dutch guilder 0 2 0
An English shilling 0 1 1
A copper coin of 1oz 0 0 2
A copper coin of oz 0 0 1
A copper coin of oz 0 0

Because small denomination copper coins were essential for trade and commerce within
the colony, the proclamation also declared that the exportation or importation, except
from His Majestys Treasury, of any sum exceeding five pounds in copper coin, would
be punished by fine of treble the value, and include forfeiture of the sum exported or
imported. Another restriction that King imposed was that since there was now sufficient
coinage in circulation, the practices of bartering goods and the issuance of private
promissory notes were to be prohibited.

In 1803 Governor King acquired a further 8000 Spanish dollars in two separate
purchases, one of 500 at six shillings each and another 7500 at five shillings each. King
paid the visiting merchants using government bills drawn on the English Treasury. To
the merchants, this was preferable because it reduced the risk of losing the booty due to
piracy and ensured payment on demand once the bills were presented at the Bank of

England. It is worthy to note that King paid 20 per cent above the international price on
his first acquisition. This obviously reflected the necessity to inject coinage into the
economy. Apart from those purchases, the first remittance to Phillip and the shipment of
copper coins, there was no other formal attempt to increase the supply of cash money
into the infant economy.

5.4 The Rum Rebellion

The government store was the principal buyer of local produce and would issue store
receipts for small amounts. Accumulated store receipts could be redeemed for treasury
bills but necessity demanded that the receipts themselves remained as negotiable
instruments within the colony. Free settlers and convicts who had served their sentences
needed to buy and sell goods and services. With limited coinage in circulation and very
few negotiable instruments available, the inadequately funded monetary system of
Sydney town stifled trade and commerce. Out of necessity, a fairly sophisticated system
of barter became established and many debts were paid in produce, land and labour.
One such medium of exchange was rum. Although much has been written about the use
of rum as currency and the abuses which arose from its supply via the New South Wales
Corps, it was just one of several commodities serving as money. Many other items such
as tea, wheat, pepper, meat and livestock were also given and accepted.

The rum rebellion of 1808 was the only successful armed takeover of Government in
Australian history. The rebellion was antagonised by the Governor William Bligh, who
in trying to re-establish and enforce Governor Kings proclamation of 1800, attempted
to normalise trading conditions by prohibiting the use of spirits as payment for
commodities. In particular, Bligh was aiming to reduce the power of the rum merchants
~ particularly the New South Wales Corps, which had a role in and profited from the
trade. These groups resented Blighs interference and the quarrel built up to a military
rebellion on 26th January 1808. George Johnston of the New South Wales Corps took
control of the colony and incarcerated Governor Bligh. Bligh was held for over a year81.

One might consider that Admiral William Bligh had a tendency to frustrate his subordinates, especially
since he had already been over-thrown once before when he captained the Bounty. Returning to England
in 1789 from Tahiti, the crew headed by Fletcher Christian mutinied leaving Bligh and 18 officers adrift
in the Pacific Ocean in a small boat without charts or sextant.

5.5 Governor Lachlan Macquaries monetary policy

In 1809, the British Government decided to recall Bligh and replaced him with Lachlan
Macquarie82. Macquarie arrived with his own regiment and ended the control of the
Corps. Macquarie found a struggling, chaotic colony which was still basically a prison
camp, with barely 5,000 European inhabitants. Supplies were short and trade and
finance were in a state of chaos. Business was conducted by barter or through
unsatisfactory media of exchange such as Commissariat Store (government store)
receipts and promissory notes. Many merchants had become petty bankers and fraud
and forgery were commonplace. This caused a great deal of litigation, which placed
undue strain on the rudimentary judicial system operating within the colony. Macquarie
ruled the colony as an enlightened despot. He made it clear that he had a vision for the
future and set about advancing Australia83. He ordered the construction of roads,
bridges, wharves, churches and public buildings. He founded new towns such as
Richmond, Windsor, Pitt Town and Castlereagh. He appointed a Colonial Secretary, a
government printer and a government architect. All these actions reflected his view that
New South Wales, despite its origins as a penal settlement, was now to be seen as a part
of the British Empire, where a free people would live and prosper and eventually govern

During his period as Governor, Macquarie presided over a rapid increase in population84
and in economic activity. With an ever increasing proportion of the population earning
their own living, the colony began to have a life beyond its functions as a penal
settlement. These structural changes necessitated the formulation of new social and
economic policies.

Lieutenant Colonel Lachlan Macquarie (b. 1762, d. 1824), was Governor of the colony of New South
Wales between 1810 and 1821and is regarded by many as the real father of Australia. He joined the
British Army in 1776 and served in North America, India and Egypt. After serving for 12 years as a
Captain he considered leaving the Army, but extended his career in 1808 when he was commissioned to
take up the position of Governor for the colony. He was given a mandate to restore government and
discipline in the colony following the Rum Rebellion against Governor Bligh.
Up until 1817 the continent was still regarded as New Holland. On the 21 st December 1817 Macquarie
recommended that henceforth the continent should be called Australia.
During the twelve years of Macquaries governorship the European population went from 5,000 to

5.6 The Holey Dollar

The acquisitions of Spanish dollars in 1803 were just about exhausted by the time
Macquarie took Office. In October 1810 Macquarie requested a supply of 5,000 in
copper coin to be issued at double the value as in Governor Kings time. Although the
British Government denied his request, Macquarie reiterated through proclamation that
copper coin was legal tender for amounts up to 5 and extended that limit indefinitely
for government bills whose mode of payment was specified as copper. The 5 limit was
later reduced to 1/3d (i.e. 1 shilling 3 pence) after Macquarie initiated some creative
monetary policy and issued his now famous holey dollar85.

In November 1812, Macquarie received 40,000 Spanish dollars (about 8,000) shipped
from India by the East India Company under contract from the British Government with
instructions from the Earl of Liverpool to take measures to ensure that they remained in
the colony86. To this end Macquarie engaged the services of silversmith and convicted
forger, William Henshall, to punch the centre out of each coin yielding a ring and a
dump. Each piece was to be counter stamped with its nominated value; the ring at 5/-
and the dump at 1/3d. Thus 8,000 worth of coin yielded a circulation value of 10,000.
On the 1st July 1813, Governor Macquarie issued a proclamation establishing the
colony's holey dollar and dumps as legal tender. He also set their value. Due to some
difficulties with the machinery, some coins were suspiciously lost during the early
stages of production. These difficulties led to considerable delays in delivery of the new
coins, so although they were dated 1813, the Commissary did not receive them until
early 1814 87.

The term holey dollar was not used officially until about 1820 but it seems likely that that unofficial
use of the name was almost immediate. Today fewer than 300 genuine holey dollars are known to exist.
Mira, W.J.D. & Noble, W.J. (1988) The Holey Dollars of New South Wales, Australian Numismatic
Society and Museum of Applied Arts and Sciences, Sydney.
McLeod, S. (1994) References to Money in Early New South Wales, Journal of the Australian
Numismatic Society.

5.7 Banking

In 1817 with the patronage of the Governor, a group of Sydney businessmen formed the
Bank of New South Wales and commenced operation. As was the standard international
practice in those days, banks issued promissory bills to their own customers (very much
similar to a personalised cheque which could be traded or cashed in at the bank). Bank
bills were use as a medium of exchange and circulated readily. The level of acceptance
depended on the faith the receiver had in the institution that issued the notes. Obviously
the colonys only bank soon established a solid reputation and not only formed an
integral part of the colonys monetary system but became a source of wealth creation in
that lending and enterprise could prosper.

Two years later, Macquarie gave his support to the establishment of the colonys first
savings bank, the New South Wales Savings Bank, known generally as Campbells
Bank after its secretary and joint-founder Robert Campbell. When it began to hold the
money of newly-arrived convicts for safe keeping, the new savings bank also became
known as the Prisoners Bank88.

Thus by the beginning of the 1820s, two forms of banking were established, one to meet
the needs of the business community and the other to encourage savings amongst the
poorer sections of society. These strands of banking continued to be separated for
almost a century. Commercial banking remained the province of the private financier
until the Commonwealth Bank entered the field in 1913 and savings banking remained
under the control of the colonial Governments.

5.8 The retirement of the Spanish Dollar

The holey dollars and dumps were devalued to their correct value in 1822 when
Governor Brisbane re-issued the ring as 3/4 dollars and the dumps as quarter dollars.
The devaluation was necessary to restore parity with unmutilated coins that had come
into the colony. It also meant that Spanish dollars and British pounds could again be
inter-convertible at the standard international rate. In 1825 the British Treasury sought
to impose a uniform medium of exchange throughout all sections of the Public Service.
To this end it arranged for substantial shipments of English coin to be delivered to the

Commonwealth Banking Corporation (1980) CBC; its Background, History and Present Operations,
Griffin Press Limited, Netley, South Australia, p 8.

colonies and issued Orders-in-Council providing that dollars could be substituted at the
rate of 4/4d (4 shillings 4 pence) until such time as sufficient English coin became
available. The first shipments of coin arrived in late 1825 and the gradual withdrawal of
the Spanish dollars from circulation commenced. For the next seventy years the
colonies depended upon the British Treasury for the issuance of coin.

Having reviewed the early years of British settlement, there are several acts that need to
be drawn to our attention. Firstly, Governor Phillips first formal act of monetary policy
was the request of cash money from England. The demand for coinage was necessitated
by the need to develop an economy that was not solely based on convict labour. The
mergence of small enterprise, trade, commerce and the building of infrastructure could
only proceed if there was an efficient financial system in place. Secondly, examining
both Kings and Macquaries economic initiatives, it becomes evident, that the
Governor, through proclamation and by the issuance of currency, had the uncanny
ability to create wealth. Comprehending that King doubled the value of the penny
through proclamation and Macquarie increased his purchasing power by 25 per cent by
re-minting some existing coin, it demonstrates how the sovereign master can finance
government administration and public works. But the aim of this thesis is to examine
the authority by which these early Governors exercised their power and determine the
legal validity of their actions. To do this it becomes necessary to examine the laws that
were in place when these acts were carried out.

5.9 The Laws according to Sir William Blackstone

Sir William Blackstones fame rests largely on his Commentaries on the Laws of
England which he wrote in the 1760s. The Commentaries were a series of lectures that
he had earlier delivered to his students at Oxford University. The Commentaries which
became highly influential in legal education presented a comprehensive account of
English law as it stood at the time of British settlement in the colony of New South
Wales. Because these Commentaries represent the best authority for this period, they
will be used in order to identify the legal validity of the Governors actions.

Chapter 7 of Book 1 of Blackstones Commentaries lays out clearly what laws applied.
In the following extract, to make it easier for the modern reader to understand, some
spelling has been slightly modified, but not all. Words such as stretcheth and intrench
with which the modern reader can still identify have been left in their original form.

Other words such as alfo, troublefome, difpofition and fucceffor have been replaced by
their modern equivalents. What follows is an abridged version of the text, but
nevertheless conveys the inherent message of the Kings prerogative to coin money and
oversee commerce.

The powers which are vested in the crown by the laws of England, are necessary
for the support of society; and do not intrench any farther on our natural
liberties, than is expedient for the maintenance of our civil society The King
hath a prerogative in all things, that are not injurious to the subject; for in them
all it must be remembered, that the Kings prerogative stretcheth not to the doing
of any wrong By the word prerogative we usually understand that special pre-
eminence, which the King hath, over and above all other persons, and out of the
ordinary course of the common law, in right of his regal dignity. It signifies, in
its etymology, (from prae and rogo) something that is required or demanded
before, or in preference to, all others. And hence it follows, that it must be in its
nature singular and eccentrical; that it can only be applied to those rights and
capacities which the King enjoys alone in contradistinction to others, and not
to those which he enjoys in common with any of his subjects: for if once any
one prerogative of the crown could be held in common with the subject, it would
cease to be prerogative any longer

Prerogatives are either direct or incidental. The direct are such positive
substantial parts of the royal character and authority, as are rooted in and spring
from the Kings political person, considered merely by itself, without reference
to any other extrinsic circumstance

Under every monarchical establishment, it is necessary to distinguish the prince

from his subjects, not only by the outward pomp and decorations of majesty, but
also by ascribing to him certain qualities, as inherent in his royal capacity,
distinct from and superior to those of any other individual in the nation. For,
though a philosophical mind will consider the royal person merely as one man
appointed by mutual consent to preside over many others, and will pay him that
reverence and duty which the principles of society demand, yet the mass of
mankind will be apt to grown insolent and refractory, if taught to consider their
prince as a man of no greater perfection than themselves. The law therefore
ascribes to the King, in his high political character, not only large powers and
emoluments which form his prerogative and revenue, but likewise certain
attributes of a great and transcendent nature; by which the people are led to
consider him in the light of a superior being, and to pay him that awful respect,
which may enable him with greater ease to carry on the business of
government His realm is declared to be an empire, and his crown imperial, by
many acts of parliament, particularly the statutes 24 Hen. VIII. c. 12. and 25
Hen. VIII. c. 28; which at the same time declare the King to be the supreme head
of the realm in matters both civil and ecclesiastical, and of consequence inferior
to no man upon earth, dependent no on man, accountable to no man. Hence it
is, that no suit or action can be brought against the King, even in civil matters,
because no court can have jurisdiction over him. He may reject what bills,
may make what treaties, may coin what money, may create what peers, may
pardon what offences he pleases: unless where the constitution hath expressly,
or by evident consequence, laid down some exception or boundary; declaring,

that thus far the prerogative shall go and no farther. For otherwise the power of
the crown would indeed be but a name and a shadow, insufficient for the ends of

Another light in which the laws of England consider the King with regard to
domestic concerns, is as the arbiter of commerce. For which reason the
affairs of commerce are regulated by a law of their own, called the law merchant
or lex mercatoria, which all nations agree in and take notice of. And in
particular the law of England does in many cases refer itself to it, and leaves the
causes of merchants to be tried by their own peculiar customs; and that often
even in matters relating to inland trade, as for instance with regard to the
drawing, the acceptance, and the transfer, of bills of exchange

The standard of weights was originally taken from corns of wheat, whence the
lowest denomination of weights we have is still called a grain; thirty two of
which are directed, by the statute called compositio mensurarum, to compose a
penny weight whereof twenty make an ounce, twelve ounces a pound, and so
upwards. And upon these principles the first standards were made; which, being
originally so fixed by the crown, their subsequent regulations have been
generally made by the King in parliament. Thus, under King Westminster, A. D.
1197, it was ordained that there shall be only one weight and one measure
throughout the Kingdom

As money is the medium of commerce, it is the Kings prerogative, as the arbiter

of domestic commerce, to give it authority or make it current. Money is an
universal medium, or common standard, by comparison with which the value of
all merchandise may be ascertained: or it is a sign, which represents the
respective values of all commodities. Metals are well calculated for this sign,
because they are durable and are capable of many subdivisions: and a precious
metal is still better calculated for this purpose, because it is the most portable. A
metal is also the most proper for a common measure, because it can easily be
reduced to the same standard in all nations; and every particular nation fixed on
it its own impression, that the weight and standard (wherein consists the
intrinsic value) may both be known by inspection only

The coining of money is in all states the act of the sovereign power; for the
reason just mentioned, that its value may be known on inspection. And with
respect to coinage in general, there are three things to be considered therein; the
materials, the impression, and the denominationWith regard to the materials,
Sir Edward Coke lays it down, that the money of England must either be of gold
or silver; and none other was ever issued by the royal authority till 1672, when
copper farthings and half-pence were coined by King Charles the Second, and
ordered by proclamation to be current in all payments, under the value of six-
pence, and not otherwise. But this copper coin is not upon the same footing with
the other in many respects, particularly with regard to the offence of
counterfeiting itAs to the impression, the stamping thereof is the
unquestionable prerogative of the crown:

The denomination, or the value for which the coin is to pass current, is likewise
in the breast of the King; and, if any unusual pieces are coined, that value
must be ascertained by proclamation. In order to fix the value, the weight, and
the fineness of the metal are to be taken into consideration together. When a

given weight of gold or silver is of a given fineness, it is then of the true
standard, and called sterling metal;

And of this sterling metal all the coin of the Kingdom must be made by the
statute 25 Edw. III. c. 13. So that the Kings prerogative seemeth not to extend
to the debasing or inhancing the value of the coin, below or above the sterling

The King may also, by his proclamation, legitimate foreign coin, and make it
current here: declaring at what value it shall be taken in payments But this, I
apprehend, ought to be by comparison with the standard of our own coin;
otherwise the consent of parliament will be necessary The King may also at
any time decry, or cry down, any coin of the Kingdom, and make it no longer

5.10 The validity of the Governors actions

It can be seen that the actions of the first Governors complied substantially with the
laws that were in place at that time. Acting in their capacity as agent for the Crown, the
Governors, assumed their high political character, pardon offences, granted land, issued
coin, regulated the affairs of commerce and proclaimed foreign coin to be legitimate,
and current. There were however instances where Governor King changed the value of
coin and Macquarie increased his purchasing power by re-minting Spanish dollars.
Under normal circumstances changing the value of coin which was subject to the
international order of weights and measures would be something that would not be
deemed appropriate, as it debased the true value and standard of Sterling metal. The
over-valuation of copper coinage led to it being classed as currency rather than
sterling89. But in contrast with this, the authority was vested with the Governors to
make laws by proclamation. In this instant, their proclamations were made with the best
interests of the colony in mind. Although the Governors changed the purchasing power
of the coin, it was done in a manner that merely made it no longer Sterling. As money
was in short supply and necessary for the advancement of commerce, it was the
Governors prerogative, as the arbiter of domestic commerce, to make laws that
effectuated an efficient use of resources. To this end the Governors had no option but to
debase the coin in circulation, re-mint it and make it current.

So for the first period under examination, the Governors acted as agents for the
Sovereign, with delegated power via the administrative authority of the British

Currency and sterling each had their part to play in the cash-starved colonial economy but there
was a premium on sterling. A shopkeeper was likely to give a discount to a patron who paid in

Parliament, to make laws by proclamation, necessary for the support and maintenance
of society. The authority to act can be sourced directly back to the sovereign power. To
this end, the proclamations and acts of the Governors, must be deemed to have been
legally valid and binding as the grundnorm rested with the British sovereign.

Chapter 6

A lucky country

6.1 Golden soil and wealth for toil

The discovery of gold, at Bathurst in 1851 and shortly afterwards at Ballarat and
Bendigo transformed the colonies economically, politically and demographically. The
gold rushes led to an enormous expansion in population. Within a few years the new
settlers outnumbered the ex-convicts and began to demand the usual symbols of British
constitutionalism, including trial by jury, representative government, a free press and of
course Liberty.

In response to Australias new found wealth and the population boom, the demand for
coin escalated. Subsequently the Royal Mint established branches in Sydney and
Melbourne. The colonial Mints were employed in the striking of gold sovereigns and
half-sovereigns, however from the outset there had always been a lack of small-
denomination copper coins. In 1898 the British Government granted permission for the
colonial Governments of New South Wales and Victoria to strike silver and bronze
coins, but with the disruption of Federation and the introduction of the Commonwealth
of Australia Constitution Act it then became a domestic issue. Unfortunately the Mints
in Sydney and Melbourne were not in a position to cope with the manufacturing of the
nations new currency, so for the first few years, the majority of Australian coins were
still ordered from the Royal Mint in London.

6.2 A Nation is born

On the 1st January 1901, the Australian Commonwealth Government assumed power
for managing the nation. The Government derived its power from a British Act of
Parliament in 1900, that being the Commonwealth of Australia Constitution Act. The
Australian Constitution provided the basic rules for governing the country, binding
everybody including the Commonwealth Parliament and each State Parliament.
Accordingly, any action ~ including legislative action ~ was invalid if it was contrary to
the Constitution. Under the subsections of section 51 of the Constitution, the legislative
powers of the Parliament extend to making laws for the peace, order, and good

government with respect to, trade and commerce, taxation, currency, coinage, and legal
tender, banking, and the issue of paper money, weights and measures, bills of exchange
and promissory notes.

With respect to the issue of paper money, as a temporary measure the Treasury began
overprinting the privately issued notes that were in circulation, in preparation for the
issue of a new national currency. Surprisingly it took twelve years before the new notes
rolled of the press.

6.3 Which Bank?

In the elections of 1910, Andrew Fishers Labor Party won with a clear majority in both
Houses of Parliament. Later that year the Government introduced the first purely
Australian silver coinage, in denominations of threepence, sixpence, one shilling, and
two shillings. Copper pennies and halfpennies followed in 1911. At that time, the
Australian community was well conditioned to the political rhetoric of government

involvement in economic affairs90. Some form of intervention in national banking was
widely expected, to take its place alongside the existing and highly successful State-
Government owned savings banks. In November 1911 Prime Minister Fisher introduced
the Commonwealth Bank Bill into Federal Parliament from which eight months later the
Bank came into existence.

The Commonwealth Bank was by all accounts Australias first central bank ~ that being
the mechanism by which the Federal Government could issue and distribute currency to
the nation. In 1913 the first national banknotes were introduced in denominations of 10
shillings, and 1, 5, and 10 pounds. 1914 saw the introduction of 20, 50, 100, and 1000
pound notes 91. The 1000 note only saw limited circulation and was later confined to
inter-bank use. The Australian Pound was on the International Gold Standard and was
equal in value to the Pound Sterling.

The Australian note issue had its origins in the Australian Notes Act of 1910. Prior to
this, paper currency circulating in Australia had comprised of notes issued by trading
banks and uniquely by the Queensland State Government92. The Notes Act made it an
offence for any bank to circulate notes issued by a State and withdrew their status as
legal tender. Issue of notes by trading banks was effectively discouraged by the Bank
Notes Tax Act 1910, which imposed a tax of 10 per cent per annum on all notes issued
by them. The Australian Notes Act vested control of the note issue in the
Commonwealth Treasury. This now meant that Commonwealth Government had the
monopoly on the issuance of all Australian money.

In 1920 the amended Commonwealth Bank Act transferred control of the note issue
from the Treasury to a new Notes Issue Department within the Commonwealth Bank.

Commonwealth Banking Corporation (1980) CBC; its Background, History and Present Operations,
Griffin Press Limited, Netley, South Australia, p 20.
The first printing works to produce the new notes was situated near the docks at the western end of
Flinders Street, Melbourne. In 1912, Thomas Samuel Harrison, an Englishman with extensive knowledge
and experience in the field of security printing, was appointed Australias first note printer. After a busy
year acquiring machinery and setting up production facilities, Harrison had the first Australian note ready
for numbering on 1st May 1913.
Queensland was the only colony that issued its own currency. This was authorised by the Constitution
Act 1867 (Qld) section 2 which stated that the government could make laws for the peace and welfare of
the colony in all cases what so ever. This section was made redundant by the enactment of the
Commonwealth of Australia Constitution Act, under s51 (xii) and rendered invalid under s 109 once the
Commonwealth Notes Act was passed in 1910.

Control was transferred to a Board of Directors, appointed by the Commonwealth
Government, with the Governor of the Commonwealth Bank as Chairman. At the same
time the administration of the note issue was taken over by a special Department. The
Bank and the Notes Board were formally independent of one another.

There was in theory a constraint placed on the issue of notes by Australias nominal
adherence to the International Gold Standard. All notes issued by the Notes Issue
Department bore the promise of the Australian Treasury that they would be redeemable
in gold bullion at the Commonwealth Banks Head Office. The Commonwealth Bank
however did not fully comply with this requirement, saying that it was the Treasurys
promise in conjunction with the Notes Board that imposed an extra burden on the Bank.

By the end of 1923 the Boards actions had antagonised primary producers and
commercial banks. These interests sought redress by appealing to Prime Minister
Stanley Melbourne Bruce . Bruce was a sympathetic listener and urged the Board to
increase the note issue, but the Government found the Board uncooperative to its
directives and decided to abolish the Board. This was done as part of the reform of the
Commonwealth Bank, contained in the Commonwealth Bank Act of 1924. The amended
Act eliminated the Notes Board and the Australian Treasury resumed control ~ but the
Banks Department still printed the notes.

In 1945, another amendment to the Commonwealth Bank Act formally established the
Commonwealth Bank as sole legal issuer of Australian currency notes. In 1960, this role
passed to the Reserve Bank of Australia which from that time onward assumed
responsibility for central banking functions. The Reserve Bank Act 1959 stipulates, inter
alia, that Australian notes shall be printed by, or under the authority of, the Reserve
Bank 94.

First Viscount Bruce of Melbourne [thats UK Melbourne] National Party leader, term 1923 to 1929.

Notes are printed at Note Printing Australia Limited (a separately incorporated, wholly owned
subsidiary of the Reserve Bank of Australia) situated at Craigieburn, 25 kilometres north of Melbourne.
The notes are circulated into the economy via banks and other financial intermediaries.

6.4 Some events of the last 40 years

In 1966 following the introduction of decimal currency with the new Australian dollar,
the value of the national currency continued to be managed in accord with the Bretton
Woods gold standard ~ as it had been since 1944. Essentially the value of the
Australian dollar was managed with reference to the value of gold, although in practice
it was the US dollar that was actually used. As early as 1910 the US economy had
overtaken the British economy as being the largest on the planet. With this new found
status the US was in a position to dictate to the world how it intended to do business. In
1936 the US Treasury set the value of the American dollar at $36 per Troy ounce of
gold, the rest of the world simply pegged the value of their currency to the value of the
US dollar and followed suit.

August 1971 saw US President Richard Nixon announce his economic emergency
package which included a wage and price freeze in the US, a 10 per cent import
surcharge and the suspension of US dollar convertibility into gold. Unquestionably, the
closing of the gold window was a seismic shock that unleashed financial reverberations
that were felt even a decade later. The abandonment of the Bretton Woods Agreement
ended the system of fixed exchange rates. By December 1971, it was obvious that the

The Bretton Woods Conference took place in July 1944, at Bretton Woods, New Hampshire, USA. Its
purpose was to reach agreement on procedures and protocols for the international financial system.

imbalances created and pent up by fixed exchange rate system were about to erupt. The
US Government discontinued the practice of managing the value of the US dollar with
relation to the value of gold and from that point onward Australia slowly loosened its
usage of the US dollar as a means of measuring its own currency value. However for
more than a decade Australia continued to peg the Australian dollar to the US dollar
using a moving peg.

In October 1972 Egyptian armed forces caught Israel unaware during their Yom Kippur
religious rituals and war broke out. Simultaneously the Organisation of Arabic
Petroleum Exporting Countries (OAPEC) decided to reduce or ban exports towards
some Western countries and the Organisation of Petrol Exporting Countries (OPEC)
decided to massively increase petroleum prices. Along with the break down of the
Bretton Woods Agreement, these events lit the fuse of inflation. What followed was an
era of financial turmoil that tested the very foundations of Western society; the value of
the US dollar plunged; unemployment rose; oil prices skyrocketed to US$39 a barrel;
stock-market indices fell; gold reached US$800 an ounce; inflation exploded; and
interest rates followed suit.

In 1983 the Australian Government floated the Australian dollar, meaning that it no
longer managed its value by reference to the US dollar or any other foreign currency.
Today the value of the Australian dollar is managed with almost exclusive reference to
domestic measures of value such as the Consumer Price Index under the management of
an independent government corporate entity.

Around 1990 there was a general consensus that the RBA should implement a single
objective for monetary policy focusing on a legislated inflation target. The Note
Printing Branch of the RBA was renamed Note Printing Australia in 1990 and became
a separate incorporated, wholly owned subsidiary of the Reserve Bank of Australia in
1998. In 1993 the RBA was directed by the Federal Government to maintain inflation
within specified bounds. In 1996 the Howard Government passed legislation giving the
RBA the mandate to take full responsibility of maintaining inflation between 2 and 3
per cent. The Reserve Bank of Australia is now responsible for the economic welfare of
the nation. For better or worse, every Australian is affected by the RBAs decisions.

6.5 Points for concern

The point to note here is, the distancing of accountability from the public. We now have
a corporate entity, owned by a government department, printing money for Australia.
The RBA is allowed to function independent of government control. But the
Government is accountable because ultimate sovereignty rests with the people. How is
it possible for the public to demand accountability from a self-functioning corporate
entity? Should not the most lucrative enterprise in Australia be conducted behind glass
doors? This then requires an answer to this question; How valid is the law that
authorises the printing of money and from what source does Note Printing Australia
derive its general norm?

Chapter 7

Rationale for strategies and implementation of current policies

7.1 An important development ~ Inflation targeting

This chapter draws special attention to what must be considered the most important
development in economic theory and practice since Milton Friedman96 enlightened the
economic world to the virtues of monetary policy. Although inflation had been an
economic problem even before Adam Smith97 was a boy, no mechanism had ever
proved to be successful in combating inflation. Through the 1970s and 1980s inflation
ran rampant. Reviewing history, it was only by the late 1980s that the RBA and the
Government finally realised they had two problems, one being inflation and the other
being how to control it. Every one knew there was a problem but even in 1990,
Australia still did not have an effective mechanism in place to control inflation. At that
time, inflation targeting was a relatively new concept that had only just been proved
possible, via the vehicle of monetary policy, data collection and computing technology.

The subject of inflation targeting presents a splendid example of how Australian

economic management evolved. By reviewing the data of inflation targeting it becomes
evident especially when viewing the graph in Figure 2 below, that the decision to move
towards this policy was definitely a positive one in maintaining economic stability.

7.2 Inflation over the long run

Figure 2. shows the volatility of inflation from 1970 to 2004. Because of external
shocks experienced in the 1970s due to the adoption of flexible exchange rates and the
consequences of OPECs increased oil prices, inflation started to soar. After a period of
time inflation died down only to be re-ignited in 1983 when Australia floated the dollar.

The economist Milton Friedman, won the 1976 Nobel Prize for economics. He was the leading
exponent of the conservative, free-enterprise point of view in modern economics identified with the
University of Chicago. Friedmans monetary policy approach to economics offered a major alternative to
the fiscal policies of John Maynard Keynes. Friedmans ideas had a profound impact on global economics
in that his methodology of controlling the amount of money in circulation affected economic growth.
Often called the founder of modern economics in English speaking countries, Adam Smith, (b.1723 in
Scotland) was an outstanding social philosopher and economist whose masterwork, An Inquiry into the
Nature and Causes of the Wealth of Nations (1776), is regarded as one of the most influential studies of
Western civilisation. Smiths major thesis was that, except for limited functions ~ defence, justice, and
certain public works ~ the State should refrain from interfering with the economic life of a nation and let
the free market rule.

Through the next eight years inflation continued to show signs of volatility up until
1991 when inflation finally reached an acceptable level. In 1993 the RBA was directed
by the Federal Government to maintain inflation within specified bounds. RBA
Governor Bernie Fraser announced the adoption of the 2 - 3 per cent inflation target.
Since 1993 inflation has hovered between 1 and 6 per cent. In 1996 the Howard
Government passed legislation giving the RBA the mandate to take full responsibility of
maintaining inflation between 2 and 3 per cent. It could be easy to ask why didnt the
Government simply give the same directive to the RBA back in 1970? That is a
poignant question, but reality reveals that the technique of maintaining stability in an
economy through inflation targeting was only conceived, developed and implemented
due to advances in computer technology, expansions in data collection and development
of econometric modelling and only became available in the early 1990s.

Figure 2.

7.3 Rationale for strategies and implementation of current policies

The drive for market deregulation, microeconomic reform and a shift towards more
production for exports has been a feature of Australian Government policy for the past
20 years. The rationale for this drive was to minimise the trade off between
unemployment and the current account deficit. By making the Australian economy
more efficient and more internationally competitive, the Hawke Government engineered
a situation where it could induce higher levels of output and income with lower

unemployment rates while simultaneously preventing deterioration in the current
account deficit.

During the early to mid 1980s, Treasurer Paul Keating was embattled with the problem
of attempting to reduce unemployment while maintaining control over the current
account / balance of payments. Throughout the eighties, Australias current account
deficit increased to the point of being precariously irreversible. This meant that
Australia was importing far more in dollar terms than what it was exporting and doing
it, at a runaway pace.

In mid May 1986 the Australian Bureau of Statistics released the current account figure
for the previous month (April 1986). The current account was much worse than
predicted. It was a deficit of A$1.48 billion for the month and many economic
commentators described the magnitude as being unsustainable. According to political
writer Paul Kelly98, a Treasury official remarked to Treasurer Keating that Were
buggered to which Keating replied Yes we are. On the 14th May 1986 while at a
breakfast function in Victoria, Treasurer Keating gave an impromptu interview on
radio99 where he admitted:

We are importing about $12 billion more than we are exporting on an

annual basis. What this means is we are living beyond our capacity to
meet our obligations by $12 billion we must let Australians know
truthfully, honestly, earnestly, just what sort of international hole
Australia is in If this government cannot get the adjustment, get
manufacturing going again and keep moderate wage outcomes and a
sensible economic policy, then Australia is basically done for. We will
just end up being a third rate economy If in the final analysis
Australia is so undisciplined, so disinterested in its salvation and in its
economic well-being, that it doesnt deal with these fundamental
problems, then the fallback solution is inevitable because you cant fund
$12 billion a year in perpetuity the only thing to do is to slow the
growth down to a canter. Once you slow the growth under 3 per cent,
unemployment starts to rise again.

The interviewer commented, And then you have really induced a


Keating replied, Then you are gone. You are a banana republic.

Kelly, P. (1992) The End of Certainty, Allen & Urwin Publishers, Sydney, p 211.
Transcribed by; Dornbusch, R. Fischer, S. Kearney, C. (1998), Macroeconomics, McGraw-Hill Book
Company Australia Pty Ltd. Sydney, p 394.

By 1988, there was growing concern that high inflation was having adverse effects on
the economy. The economic policies that flowed from Treasurer Keatings banana
republic speech, have been a benchmark for tighter macroeconomic management
within Australia ever since. As a result, monetary policy became increasingly focused
on reducing inflation. The unexpected depth of the early-1990s recession locked in
lower inflation outcomes by reducing the communitys inflation expectations. While the
recession we had to have had tamed political reform, it had also delivered decisive
policy changes. It was the mismanagement of monetary policy that caused the recession
and it was monetary policy that was to be transformed by the recession. As a result there
were several important steps which unfolded within the RBA.

Through the 1980s the consensus for low inflation rested on two propositions. First,
active monetary policy, which seemed too ambitious about reducing unemployment was
likely to lead to higher inflation and higher interest rates in the longer term. Second,
long-run price stability promoted higher levels of economic output and economic
growth. High inflation distorted relative-price signals, causing over-investment in the
financial sector and, through its interaction with the tax system, could lead to less
efficient and lower, investment.

Monetary targeting enabled the policy-makers to take account of domestic

developments in setting policy. It was easy to understand and it was easy to determine
relatively quickly, whether the target was being achieved. However, successful
monetary targeting was reliant upon the relationship between the targeted aggregate and
the goal of monetary policy remaining stable, with the aggregate being controllable by
the central bank. The failure of being able to meet both conditions in a large number of
countries eventually led to the widespread abandoning of monetary targeting.

Inflation targeting avoided the problem of an unstable relationship between

unemployment and interest rates by focusing directly on the final goal of maintaining a
preset level of inflation. Inflation targeting was also easily understood by the public and
in practice, was associated with a significant increase in the transparency and
accountability of monetary policy. However, a disadvantage of inflation targeting was
the difficulty of directly controlling inflation. Moreover, the long and variable lags100 in

The amount of time it takes for an economic event or a shock to filter its way through the system.

monetary policy and the absence of a simple rule can make it difficult for the public to
monitor the performance of the central bank in a timely manner.

Around 1990 there was a general consensus that the RBA should implement a single
objective for monetary policy focusing on a legislated inflation target. The case for this
approach rested on three broad arguments. First, fine-tuning the business cycle was
problematic given the difficulties of forecasting economic activity, and the long and
variable lags of monetary policy. Second, high inflation imposed costs upon the
economy, which was inevitably followed by a period of costly disinflation. Third, if
monetary policy focused directly on employment, the authorities might target an
outcome that was too high leading to rising inflation anyway, but with no ultimate gain
to employment. Other proposals abounded suggesting there should be clearly defined
review procedures if the specified inflation target was not met and that monetary-policy
decisions should be delegated to groups of experts, operating independently of
government ~ but with substantial accountability having the minutes of RBA meetings

In 1993 RBA Governor Bernie Fraser announced the adoption of the 2 - 3 per cent
inflation target. This led to the gradual acceptance of the RBAs need for independence
by both sides of politics. When the Howard Government came to power in March 1996,
Treasurer Costello and the RBA Governor jointly signed the Statement on the Conduct
of Monetary Policy, which confirmed the RBAs independence in conducting monetary
policy, and endorsed the Banks inflation target. The inflation target thus became the
centrepiece of the monetary policy framework. It provided discipline for monetary
policy decision-making and served as an anchor for private sector inflation expectations
~ the benefit of which was ultimately judged by the level of satisfaction experienced by
the Australian voter.

7.4 What does good monetary policy look like?

In assessing monetary policy, it is important to see it in a medium or long-term

perspective. It is also important not to get the impression that monetary policy is only
exerting an influence if it is changing the economy. It is true that monetary policy only
makes news when it is changing, but its influence is continual and can be observed by
the current level of interest rates (ie the cash rate). It is quite easy to conceive of
situations where monetary policy has not been changed for a considerable time and
appears to be doing nothing. But nevertheless the level of preset interest still exerts a

strong expansionary or contractionary effect on the economy in order to maintain price

Once we recognise that the interest rate is important, we inevitably have to ask; What
should the RBA compare the current level with? Their answer is a concept of normality
or neutrality. Of course, the RBA only expects interest rates to be normal in periods
when the economy is operating in a normal or healthy way. In situations where it is
under either sustained inflationary or disinflationary pressure, there are more important
matters at hand than to ponder such theoretical concepts as the neutral level of interest
rates. Fortunately, the Australian economy is in that small group of countries that can
rightly be described as operating in a normal or healthy way; in fact, in many ways, the
RBAs management of the Australian economy is the best example around at present101.

7.5 The process of inflation targeting monetary policy

Controlling inflation preserves the value of money. In the long run, this is the principal
way in which monetary policy can help to form a sound basis for long-term growth in
an economy.

The process of implementing monetary policy has two parts. When changing monetary
policy, the RBA announces a new target level for the cash rate (ie interest rate). The
cash rate target establishes the operating objective for the Banks market activities. It
also provides an anchor for the markets expectations about where the cash rate will be.
Secondly, the Bank then operates in the market each day to maintain the cash rate at that
target. These operations are also known as the Banks domestic, or open, market
operations. They involve transactions to buy (or sell) securities, to add funds to (or
withdraw funds from) the banking system to influence its liquidity.

The aim of these operations is to bring supply and demand in the cash market into
balance. The Reserve Banks operations focus on establishing an interest rate at which
these levels will be in balance. They operate to affect the cash rate, not the money base
~ but the process has the desirable effect of changing the amount of money in
circulation. When the amount of money in circulation can be controlled it means
inflation can also be controlled.

Macfarlane, I.J. (2002) What Does Good Monetary Policy Look Like? Governor of the Reserve Bank
of Australia, speech at the 12th Colin Clark Memorial Lecture, University of Queensland, Brisbane, 21st
August 2002.

The recognition that interest rates affect capital flows and the balance of payments has
important implications for macroeconomic stabilisation policy. First, because monetary
and fiscal policies affect interest rates, the policies have an effect on the capital account
and therefore, on the balance of payments. The effect of monetary and fiscal policies on
the balance of payments are not limited to the trade balance effect, but also extend to the
capital account. The second implication is that the way in which monetary and fiscal
policies work in affecting the domestic economy and the balance of payments, changes
when there are international capital flows. The conclusion to this is that capital flows
can be used to finance the current account deficit. The effect of this is that it usually
adds to downward pressure on the exchange rate and thus can help in achieving higher
national utility because the country becomes more competitive in the export markets 102.

Monetary policy decisions involve setting the interest rate on overnight loans in the
money market. Other interest rates in the economy (ie set by the commercial banks) are
influenced by this interest rate to varying degrees, so that the behaviour of borrowers
and lenders in the financial markets is affected by the Governments monetary policy.
Through these channels, monetary policy affects the economy in pursuit of a stable
currency, maintenance of full employment and the prosperity and welfare of the people
of Australia. But as it was previously explained, the setting of the interest rate is
determined by the RBA in its stand alone capacity, independent of the political process.
If the decision to change the interest rate is external to the Governments control, how
then do we legitimise the law with respect to monetary policy? And where do we find
the grundnorm of modern Australian monetary policy?

7.6 The Reserve Bank of Australia

The Reserve Bank of Australia is responsible for formulating and implementing

monetary policy. The Boards obligations with respect to monetary policy are laid out in
the Reserve Bank Act 1959.
Section 10(2) of the Act, which is often referred to as the Banks Charter, reads:

It is the duty of the Reserve Bank Board, within the limits of its powers, to
ensure that the monetary and banking policy of the Bank is directed to the
greatest advantage of the people of Australia and that the powers of the Bank ...

The value of a nations currency has a directly proportional affect on its imports and exports. If the
value of a currency depreciates (goes down) it means the price of its exports become relatively cheaper to
other countries. If its exports are cheaper the country usually sells more. The lower value currency also
means that to import goods from overseas will now be dearer and hence the country will usually import

are exercised in such a manner as, in the opinion of the Reserve Bank Board,
will best contribute to:

(a) the stability of the currency of Australia;

(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.

The first of these, the stability of the currency, is generally interpreted to mean price
stability; that is, a stable value of the Australian dollar in terms of its purchasing power
over goods and services. An important development in recent years is that this
objective, and its relationship to the other two, has been made more explicit with the
adoption of the Banks inflation target. This had been included in the Banks public
statements for a number of years but was formally set out in the Statement on the
Conduct of Monetary Policy, issued by the Treasurer and Reserve Bank Governor in
August 1996. To quote from the statement:

The first two objectives [i.e. the objectives set out in the Act] lead to the third,
and ultimate, objective of monetary policy and indeed economic policy as a
whole. These objectives allow the Board to focus on price [currency] stability
while taking account of the implications of monetary policy activity and,
therefore, employment in the short term. Price stability is a crucial precondition
for sustained growth in economic activity and employment103.

While the Reserve Bank Act itself has changed little with respect to the mandate for
monetary policy, the procedures and practices have however evolved considerably over
time. In order to keep the RBAs policy-making process relevant to the current
environment, and in parallel with international developments, the RBA has wisely
sought the wisdom of experts. It was through such processes that the evolution of
monetary policy was guided towards inflation targeting.

How far and how quickly interest rates should be raised will depend partly on how the
economy is performing at the time. If the economy is operating with very little surplus
capacity or is overheating, a fairly rapid rise in interest rates might be called for. If, on
the other hand, there is significant surplus capacity in the economy, the appropriate
increase in rates might be more gradual. Thus, it makes sense for policy to take account
of short-run cyclical developments in pursuing the inflation target. But having made that
point, it is important to recognise that this type of trade-off does not exist in the longer
run. Ultimately, the growth performance of the economy is determined by the

RBA press release 14th August 1996. Reported in the Reserve Bank of Australia Bulletin, September
1996 issue.

economys real productive capacity. The economy cannot be permanently stimulated by
an expansionary monetary policy stance and any attempt to do so simply results in
rising inflation.

7.7 The relationship between the Bank and the Government

The Reserve Bank Board makes decisions about interest rates independently of the
political process ~ that is, it does not accept instruction from the Government of the day
on interest rates. This principle of central bank independence in the operation of
monetary policy, in pursuit of accepted goals, is the international norm. It prevents
manipulation of interest rates for political ends and keeps monetary policy focused on
its long-term goals. With this independence naturally comes a need for consultation and
accountability. The relationship of the RBA with the Government is one of
independence, consultation and accountability to Parliament.

The Board normally meets eleven times each year, on the first Tuesday of the month
except in January. Hence the dates of meetings are well known in advance. For each
meeting the Banks staff prepare a detailed account of developments in the Australian
and international economies, and in domestic and international financial markets. The
papers contain a recommendation for the policy decision. Senior staff attend the
meeting and give presentations. Decisions by the Reserve Bank Board to change interest
rates are communicated publicly, usually on the day following the meeting.

The Governor appears twice each year before the House of Representatives Standing
Committee on Economics, Finance and Public Administration, to answer questions on
the Banks conduct of policy. In describing the processes by which monetary policy
affects the economy, it should be kept in mind that they are far from being purely
mechanical in their operation. Predictions about the effects of a policy action are, like
economic forecasts generally, always subject to uncertainty. The task of policy is to
make decisions on the basis of the best available information. Recognising that
uncertainties exist, the RBA must nevertheless formulate policy independently from
government that delivers economic prosperity and welfare to the people of Australia.

The question to ask here is: What recourse do the Australian people have if the RBA
makes the wrong decision?

Chapter 8

In search of the grundnorm

8.1 The role of government in Australia

It might appear that the role of government in Australia today has less influence on the
market than it did two decades ago. Recent events indicate that the Governments role
in the economy may be shrinking. Such events include; the privatisation of government
business enterprises104, the 1983 deregulation of financial markets and the delegation of
responsibility to the RBA for Australian monetary policy. This perception however
could be misleading. The Governments function is to provide a stable internal and
external balance under which the free market can function. This is achieved through the
use of fiscal, monetary and microeconomic strategies. Australia currently operates
under a mixed economic system of laissez-faire capitalism and government
intervention. The competitive free market is allowed to operate uninhibited [within
reasonable bounds of course] while simultaneously the Government attempts to provide
a stable economic and political environment. But to produce a stable economic
environment, Governments must proactively participate in the management of financial
affairs at the national level. The Australian Government delegated this responsibility to
the Reserve Bank of Australia. The RBA now manages monetary policy. The RBA does
this by targeting the level of inflation. The RBA adjusts inflation by changing the
interest rates. It changes the interest rates in an effort to change the amount of money in
circulation. What this really means is, the RBA has ultimate control over the economy
in that it has the uncanny ability to influence the free market by controlling the amount
of money in the economy.

If we briefly examine the Australian Constitution we can adduce that the functions of
Government include making laws under section 51, for the peace, order, and good
government of the Commonwealth with respect to; Trade and commerce; Taxation;
Bounties on goods; Public sector borrowing; Postal, telegraphic, telephonic and other
like services; Census and statistics; Currency, coinage, and legal tender; Banking;
Insurance; Weights and measures; Bills of exchange and promissory notes; Bankruptcy
and insolvency; Copyrights, patents and trade marks; Corporations; Pensions and social

Examples include the sale of Qantas, the Commonwealth Bank and Telstra.

security payments; External affairs and international relations; The acquisition of
property; The control of railways; And conciliation and arbitration matters. On closer
examination, it is clear that the major proportion of government law making
responsibility is inextricably drawn towards governing the financial affairs of our

The incidental role of Government is to maintain and protect the system. This is
demonstrated by observing that the Government also has power to:

Make laws that are binding on the courts, judges, and people of
every State and Territory of the Commonwealth [s 5 ];

Maintain a viable democratic system of government whereby

senators and members of parliament are chosen by the people of
each State [s 7 & s 24];

Vote on legislation [s 23 & s 40];

Provide naval and military defence in order to maintain the laws

of the Commonwealth [s 51 (v)].

While the Australian Constitution copied and incorporated important institutional

structures from the American system, the dominant influence was always British. The
Australian system has Ministers of State drawn from the Parliament firmly tying the
executive branch of government to the legislature. And like the UK, Australia also
developed a powerful Public Service.

8.2 A Powerful Public Service

Because Prime Minister Ben [Joseph Benedict] Chifley105 was doubtful about the
capabilities of some of his Cabinet colleagues, he surrounded himself with clever people
from the Public Service who could do things106. Prime Minister Robert Gordon
Menzies107 inherited Chifleys Public Service and he too was comfortable surrounded

Labor Prime Minister 1945 to 1949.
Information for this section is derived from the writings of Don Russell, a long term senior Public
Servant and advisor to government. Russell, D. ( 2003) The Role of Executive Government in Australia,
Presented as a lecture in the Department of the Senate Occasional Lecture Series at Parliament House on
25th October 2002. available at
Liberal Prime Minister 1949 to 1966, but had previously been Prime Minister between 1939 and 1941
when he headed the United Australia Party. To date, Robert Menzies has been Australias longest serving
Prime Minister.

by talented people. Menzies was also doubtful about the quality of his Cabinet. To
Menzies it was preferable to have power in Canberra tied up in the hands of an
experienced team of talented officials answerable directly to him, than to have it
dissipated through a collection of Ministers for whom he had only modest regard.

With the expansion of government, Prime Minister Gough Whitlam108 was determined
to implement his own agenda and for the first time Ministers were provided with staff.
The duties of ministerial staff were to provide advice and help Ministers develop and
implement policy. Obviously the most important ministerial staff were in the Prime
Ministers Office. Prime Minister Malcolm Fraser109 validated this process but went one
further. Fraser saw executive authority as residing very much with the Prime Minister
and not with his Ministers. He reserved the right to second guess his colleagues, over-
ride their decisions and dictate the direction of policy for the entire Government. And so
was created the Prime Ministers Office ~ an advisory structure that could oversee every
area of government. Malcolm Fraser put his design criteria in for the new Parliament
House ~ that legacy was incorporated into the new building. Ministers and their staff are
no longer located at the Head Office of their Departments, they are now based in the
Executive Wing of Parliament House. Ministerial Offices, while comfortable, are
relatively small with limited office space110. The Prime Ministers Office by contrast, is
large with considerable space for staff. All successive Prime Ministers have been
comfortable with the Fraser arrangements and the Prime Ministers Office is now the
most influential branch of Government in this country.

During the terms of Prime Ministers Robert Hawke111 and Paul Keating112 between
1983 and 1996, the Public Service continued to be reformed. There was increased focus

Labor Prime Minister elected at the end of 1972, dismissed by the Governor General John Kerr on
11th November 1975.
Liberal Prime Minister 1975 to 1983.
The exception is the office of the Deputy Prime Minister, which was designed for the Leader of the
National Party.
Bob Robert James Lee Hawke Labor Prime Minister 1983 to 1991. He won a Rhodes scholarship to
Oxford University. He is in the Guinness Book of Records for drinking 1.5 litres of beer in 12 seconds. He
was also the first PhD student enrolled at the faculty of Law at ANU, writing his doctoral thesis on the
basic wage.
Paul John Keating, Labor Prime Minister 1991 to 1996, had no school leaving certificate, but he was
street wise and able to beat two PhD opponents. His former colleague Dr Robert Hawke and the
opposition leader Dr John Hewson. It just goes to show how political savvy and ruthless ambition can out
perform a formal education.

on letting the managers manage. Performance assessment and making the Public
Service more efficient and accountable and more responsive to the needs of
Government and its customers became an act of delegation. Paul Keating actually liked
public servants and respected their commitment to good policy and the national interest.
He always had the highest regard for what he called the official family and was keen
that they be allowed to do their jobs. As he said in 1991 in his Higgins Memorial

Lying behind the talents of individual Cabinet Ministers is an overall

philosophic belief that the expertise of the Public Service needs to be explicitly
and deliberately brought to bear on policy matters. the critical point is that
from the very beginning this Government has been very concerned about due
process. And due process has meant that the Government has valued official
advice and made sure that the institutions that provide it are strong and effective.
It is why this Government has always believed in a career Public Service,
capable of giving independent advice. It is why the Government has not sought
to shield itself from critical advice by appointing friendly voices to key
positions. As many Governments have found to their cost it is fatal to good
government if Ministers do not listen to, or are not served by, a strong Public
Service 113.

But Paul Keating was also a firm believer in the constructive role of politicians. Unlike
a number of earlier Prime Ministers, Keating saw an important role for his Cabinet
colleagues. Again quoting from his Higgins Memorial Lecture:

While many decry the role that politicians play, only politicians can make major
changes to the way a country conducts its business In the end, politicians
have to have the foresight to see the need for change and the courage and
strength to carry it through. And the issues are now so complex and the areas
requiring change so wide that it is far beyond any individual political figure to
control the whole process 114.

8.3 Discovering the grundnorm

It is at this stage that we can see that the importance of delegating the responsibility of
managing monetary policy to the RBA follows directly the legitimate procedures that
have been long established. Because the RBA is composed of experts in the area of
economic management and is more or less the only organisation that is capable of such
a task, it stands to reason that to entrust the responsibility to any other entity would be a

Keating, P. (1991) The Challenge of public policy in Australia, inaugural Higgins Memorial Lecture,
15th May 1991. Published in the Canberra Bulletin of Public Administration, no. 65, July 1991, p 16 - 20.

high risk. Recalling the Charter of the RBA states that it is the duty of the Board to
ensure ~ to the greatest advantage ~ that monetary and banking policy is directed and
exercised in such a manner as will best contribute to the economic prosperity and
welfare of the Australian people, it becomes apparent that the RBA fulfils a normative
objective in promoting a natural right. To clarify this point, I will demonstrate by asking
this question; Ought not the living condition of every Australian be maximised in
accordance with a legally binding principle that promotes life, liberty and the
acquisition of property? Rational maximising behaviour would suggest only one
answer; a positive resounding Yes!

The general norm here is, although the RBA conducts monetary policy, that authority is
Constitutionally derived. Section 51 of the Australian Constitution authorises the
Government to make laws relating to trade and commerce, public sector borrowing,
statistics, currency, coinage, legal tender, bills of exchange, promissory notes and
banking. All these activities fall with in the ambit of financial management of which the
Reserve Bank is the only entity that has the capacity to deal with all matters
simultaneously. Because the Reserve Bank was established under an Australian Act of
Parliament and subsequently authorised to carry out activities in pursuance of its
mandate, its activities are therefore lawfully valid. There was however a problem with
this reasoning prior to 1986. Before the Australia Act of 1986 terminated the power of
Parliament of United Kingdom to legislate for Australia, the Australian Constitution
could not be regarded as the ultimate origin of valid binding laws in Australia. Prior to
the Australia Act that powerful privilege still rested with the Parliament of the United
Kingdom. It was not until 5.00 am Greenwich Mean Time on the 3rd of March 1986 that
Australia truly became a sovereign, independent and Federal nation. Because the
mandate was given to the RBA to take control of monetary policy by Treasurer Peter
Costello in 1996 ~ ten years after the Constitution became the grundnorm of Australian
law ~ the delegation can be traced to a purely Australian source.

As the Constitution is the physical manifestation of the grundnorm, the legal validity for
the RBA to conduct monetary policy in Australia has thus been discovered.

Chapter 9

Independence, accountability, legitimacy and validity

9.1 Credibility and legitimacy

This chapter discusses monetary policy, outlining the debates and the balance between
the independence and accountability of the RBA with that of government responsibility.
The chapter explores the tensions between credibility and legitimacy, concluding that
adequate attention must be paid to the legitimacy of policy so that it ensures an effective
policy mix which remains credible.

9.2 The rule of law in Australia

Australias Constitution was founded on the principles of liberty, democracy, separation

of powers, fundamental freedoms, the rule of law and principles derived from both
Natural and Positive Law. Despite the fact that the Australian Constitution makes no
reference to God, the moral beliefs of humanity are esoterically incorporated within the
body of common law which migrated to the colony of New South Wales with the First

The rule of law functions in the legal framework of Australian law as an apparatus of
equity and justice. Australia has three institutions carrying out tasks entrusted to them
by the Constitution. These are the Legislature, the Executive and the Judiciary. These
institutions must act within the limits of the powers conferred to them by the
Constitution. Although the expansionary evolution of these institutions has not been
static, the rule of law has been a guiding principle.

The rule of law can be understood by separating the professionals and the laymans
sense of law. To a lawyer, any rule that meets the conditions of legal validity laid down
in his or her legal system is law115. The laymans sense of law is an interpretation of
these rules. Law in the laymens sense is a set rules which are open, general and
relatively stable. This interpretation of law juxtaposes government by law with

Raz, J. (1979) The Rule of Law and its Virtues, The Authority of Law, Essays on law and Morality,
Clarendon Press, Oxford, p 213.

government by people. Depending on how one defines the rule of law, different features
can be attributed to the law itself. In order to understand the principle of the rule of law,
it is necessary to understand something about what law means. What legal sources can
be used to interpret the law? And where lies its authority?

A Government is by definition a Government authorised by law. Consequently

governmental action must be authorised in accordance with law and not simply as
action by the Government. A Government that does not act within the limits of its
powers breaches the principal of legality, to which the rule of law is related but not
identical. The principal of legality means that authority must be exercised on the basis
of law. The principal of legality does not, however, put any requirement as to the
material content of a law. A law made by Government that explicitly gives a
government department discretionary power is by all accounts complying with the
principal of legality.

9.3 Applying Kelsen

Kelsens theory makes it possible to understand the link between the basic act and the
implementing act in the Australian monetary system. The Government can only adopt
norms that delegate powers to the RBA, if a previous norm allows it to do so. Section
51 of the Australian Constitution contains the norm that authorises the Government to
delegate implementing powers to the RBA. The Reserve Bank Act 1959, adopted by the
Government corresponds to the Kelsens model, as it contains substantive rules and
organisational rules, the latter authorising the manner in which the RBA ought to act.

The authorising norm is found in sections 26 and 27 of the Reserve Bank Act which
basically states that the Reserve Bank shall act as a central bank of Australia, shall carry
on business as a central bank, and act as banker and financial agent of the
Commonwealth. The delegating norm (basic act) is found in section 10 where the
Reserve Bank Board has power to determine the policy of the Bank in relation to any
matter and to take such action as is necessary to ensure that the effect is directed to the
greatest advantage of the people of Australia in such a manner as, in the opinion of the
Reserve Bank Board, will best contribute to the stability of the Australian currency, the
maintenance of full employment and the economic prosperity and welfare of the people.

The two components, of authorising norm and delegating norm, form a whole that
contains the relevant law. None of these elements can be eliminated without distorting
the true effect and validity of the law.

9.4 Justification for delegation

Modern constitutional systems base their allocation of law-making powers on the

principle of democracy and the rule of law. These principals are exclusively related to
the Federal Government and do not directly apply to government departments ~ such as
the RBA. The national system cannot transfer responsibility to government departments
without adequately providing for accountability measures.

A justification for the delegation of law-making powers to the RBA could be seen in the
circumstances that each act has certain characteristics, which makes it best suited to
pursue certain tasks. The validity is based on the specific functions exercised by the
RBA and the procedures and legal instruments they have at their disposal to pursue
those functions. Each legal act ~ as recommended by the RBA Board ~ has to be
measured against certain parameters. These parameters must form part of the organic
quality of the institution and reflect the composition, procedural structure, problem-
solving capacity, transparency and control of the organisation. The respective qualities
are then implemented in relation to the functions to be performed. In the case of the
RBA, these functions relate directly to the management of the national economy. If the
RBA delivers a desirable economic outcome we could perceive that the delegation was
justified and therefore valid. Alternative to the beneficial outcome, if the Board made
the wrong decision and plunged the economy into financial ruin, we could perceive that
the delegation was not justified and therefore would have to consider that the lawful
transfer of power was not valid.

Fortunately, the track record of the RBA in managing monetary policy over the last ten
years has been extremely successful. The machinations that produce this result are
embodied within the procedural complexities of data collection, mathematics,
econometric modelling and financial adjustments. Thankfully this is a pure science that
produces determinable results based on quantifiable inputs. Similar to laws
metamorphic journey towards legal certainty, monetary policy in the twenty-first
century appears to have acquired certainty as well. As a result of science and

technology, economic stability and welfare is more certain today than at any other point
in history.

9.5 Is there a problem?

As long as economic policy remains firmly within national competence it retains its
legitimacy through the usual democratic mandate. As economic policy becomes more a
creature of the RBA the further it will move away from that source of legitimacy. An
alternative perception of legal validity may be required. Legitimacy could be achieved
by producing positive economic results. Policy is legitimate if it provides greater
benefits than costs ~ the greatest good for the greatest number perhaps. Because of the
brevity of the RBAs gained independence, it means it is still early days and will be
some time before such a long term measure of legitimacy is available.

It is important to recognise the tensions inherent in achieving a balance between the

credibility [with the markets] and legitimacy [with the general public] of the economic
and monetary policy mix, where credibility and legitimacy are conceptually distinct but
causally related. There are possible tensions between the Government and the RBA.
The credibility of the RBA and its ability to deliver price stability depends not only on
its assured independence but also in part on the broader policy-mix of government.
With economic policy firmly within the Federal realm there is a question mark over the
extent to which there can be sufficient guidelines in place to ensure successive
Governments deliver policies necessary to support price stability. The credibility of
monetary policy formation in the medium term could be undermined unless government
macroeconomic policy is also obliged with achieving the common goal of price
stability. This creates the need for Government to comply with some restrictions. These
restrictions include, maintaining budget surpluses, and formulating policies based on
intergenerational fairness. Of course it is the prerogative of the Government to do
otherwise, but fortunately they remain at the mercy of the voter, who ~ by all accounts
as the grundnorm shows us ~ is the sovereign master.

9.6 Conclusion

Both the Bank and the Government agreed on the importance of low inflation and low
inflation expectations. These assist businesses in making sound investment decisions,
underpin the creation of new and secure jobs, protect the savings of Australians and
preserve the value of the currency. Since 1993, these objectives have found practical

expression in monetary policy. These included, the conclusion that monetary policy
should target inflation and not the balance of payments; that this should be done without
legislative amendment; the announcement by Bernie Fraser in 1993 of the 2-3 per cent
target; the gradual acceptance of the RBAs need for independence by both sides of
politics; and the formalisation of the inflation targeting policy in 1996. This meant that
the RBA could finally conduct monetary policy on an independent basis without the
disruptive influences caused by ambitious political parties. Monetary policy therefore
acts as a stand-alone instrument, directed principally at achieving price stability
within the economy. To these ends, the sovereign State is a mechanism by which the
human sense of community is realised. The RBAs monetary policy assists in achieving
that objective. The current arrangements comply with the basic precepts of normative
law. The Government ought to act in the best interest of the Australian public. It did this
by delegating the complex job of managing the economy to the Reserve Bank of
Australia. The authority for that action was derived via the Constitution. The grundnorm
of which is the binding acceptance of the collective mass, who live under the reality of
commanding rules.

Monetary policy ~ 1920s style

The Commonwealth Bank moneybox was a masterpiece of Australian

merchandising. The moneybox was shaped and painted to resemble the Bank's
Head Office building in Sydney ~ which was officially opened in 1916. The box
was first introduced into the Queensland market in 1921 with it becoming
available in the other States during 1923. It was designed to encourage savings
~ which were naturally deposited with the Commonwealth Bank. Having
deposits meant that funds would be available for investment, which was exactly
what the young nation needed.

As part of an exercise to foster a belief in national thrift, a moneybox was

presented to every child born in Australia. A certificate was distributed with the
5 money order Maternity Bonus from the Commonwealth Government Pension
Department, entitling the mother to receive a moneybox from the post office
where she cashed her money order. The original moneyboxes had a trapdoor slot
to put the money in, but had no means of getting the money back out. To do that
you had to use a can opener. Parents were encouraged to take their child to the
bank to witness the opening of the box and the entering of the amount into their
passbook. Having done that, the Bank would replace the moneybox with a new
one so the exercise could be repeated and further fill the Bank's coffers 116.

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German under the title Allgemeine Theorie der Normen, by MANZ verlag Wein,
translated by Michael Hartney (1991) Oxford University Press, New York.

Ladavac, N. B. (1998) Biography of Hans Kelsen (1881 - 1973), European Journal of

International Law, Volume 9, Issue 2: 1998.

Locke, J. (1690) Two Treatises of Government II, Peter Laslett edition (1970)
Cambridge University Press, Cambridge University Press, Cambridge, UK.

Locke, J. (1696) Some Considerations of the Consequences of Lowering the Interest,

and Raising the Value of Money, two excerpts printed in The History of Gold and
Silver, Edited by L H White (2000), Pickering and Chatto Publishers, Bloomsbury Way,

Luck, P. (1992) Australian Icons: Things that make us what we are, William
Heinemann Publishers, Melbourne, Australia.

MacCormick, N. (1999) Questioning Sovereignty: Law, State, and Practical Reason,

Oxford University Press, Oxford, UK.

McDonald, G. (2000) The Pocketbook Guide to Australian Coins and Banknotes,
Seventh Edition, McDonald Publishing, Lavington NSW.

McLeod, S. (1994) References to Money in Early New South Wales, Journal of the
Australian Numismatic Society.

Mtall, R.A. (1969) Hans Kelsen, Leben und Werk, [Life and Work], Deuticke,
Vienna. Journal of Public Law.

Mill, J. S. (1848) Principles of political economy, (1909 Ashley ed.) Longmans, Green,

Mira, W.J.D. & Noble, W.J. (1988) The Holey Dollars of New South Wales, Australian
Numismatic Society and Museum of Applied Arts and Sciences, Sydney.

Mitchell, B.R. (1992) International Historical Statistics: Europe, 1750-1988,

Macmillan, London.

Moore, W. H. (1910) The Constitution of the Commonwealth of Australia, Charles F.

Maxwell (G. Partridge & Co.) Little Collins Street, Melbourne.

Oresme, N. Bishop (c. 1355) De Moneta, translated by Charles Johnson (1956),

Thomas Nelson and Son Ltd, London.

Pitt, I. editor, (2000) Renniks Australian Coin and Banknote Values, nineteenth
edition, Renniks Publications, Sydney.

Polden, K.A. (1977) The Australian Note Issue, Ph.D. Thesis, University of
Queensland, Brisbane.

Raz, J. (1979) The Rule of Law and its Virtues, The Authority of Law, Essays on law
and Morality, Clarendon Press, Oxford.

Readers Digest (1974) Australias Yesterdays, Readers Digest Services Pty Ltd,

Readers Digest (1985) The Last Two Million Years, The Readers Digest Association,

Research Department, Reserve Bank of Australia, Conference paper (1990) The

Australian Macro-Economy in the 1980s, Robert Burton Printers Pty Ltd, Sefton 2162,

Scruton, R. (1984) A Dictionary of Political Thought, Hill and Wang, New York.

Shapiro, I. (1986) The Evolution of Rights in Liberal Theory, Cambridge University

Press, Cambridge , UK.

Sharples, J. (1990) On Collecting Commonwealth Coins, Journal of the Numismatic

Association of Australia, volume 5.

Skinner, D.H. editor, (1976) Renniks Australian Coin and Banknote Guide (10th ed.),
Skinner & Warnes, Salisbury Heights, South Australia.

Smith, A. (1776) An Inquiry into the Nature and Causes of The Wealth of Nations,
reprinted in 1937 by Random House Inc., Parkway Printing Co, New York.

Waldron, J. (1999) Law and Disagreement, Oxford University Press, Oxford, UK.

White, L.H. editor (2000) The History of Gold and Silver, Pickering and Chatto
Publishers, Bloomsbury Way, London.

Reference Books

Concise Australian Encyclopaedia, Angus & Robertson Publishers, Sydney.

The Concise Oxford - Australian Dictionary, Oxford University Press, Melbourne,


The Concise Oxford - Duden German Dictionary, Oxford University Press Inc., New

The Holy Bible, King James version and the Good News version, Bible Society of
Australia, Canberra.

Australian Legislation

Australia Act of 1986

Australian Notes Act of 1910
Australian Prudential Regulation Authority Act of 1998
Bank Notes Tax Act of 1910
Banking Act of 1959
Commonwealth Bank Act of 1911
Commonwealth Bank Act of 1924
Commonwealth Bank Act of 1945
Commonwealth Bank Act of 1959
Commonwealth Bank Act of 1995
Currency Act of 1965
Reserve Bank of Australia Act of 1959

British Legislation

Australia Act of 1986 UK

Commonwealth of Australia Constitution Act of 1900 UK
Statute of Greatley of 928 UK
The Bank Act of 1844 UK

Speeches and Press releases

Calvert, A. Dr (2000) Speech by the Secretary of the Department of Foreign Affairs and
Trade, Dr Ashton Calvert, to the National Press Club outlining Australias trade policy,
on the 3rd August 2000.

Cotton, Sir R. (1626) A discourse pronounced by Sir Robert Cotton... before the Lords
of his majesties most honourable privie councell at the councell table beinge thither
called to deliver his opinion touchinge the alteration of coyne... MS.(unidentified hand);
[n.p., ca. 1640]7f.(13p.) Speech delivered 2nd Sep 1626. Publ. in Cottoni posthuma,
(London, 1651). v.1, f.114-120.

Cotton, Sir R. (1640) quoting Henry de Bracton in An answere to certaine arguments,

raysed from supposed antiquitie and practise, by some members of the Lower House of
Parliament to prove that ecclesiasticall lawes ought to bee enacted by temporall men.
Manuscript [n.p., ca. 1640] 10f.(19p.) Publ. in Cottoni posthuma, (London, 1651). v.1,

Greenspan, A. (2002) The History of Money, Remarks by the Chairman of the US

Federal Reserve Bank, at the opening of the American Numismatic Society Exhibition,
in New York, on 16th January 2002.
Available at

Keating, P. (1991) The Challenge of public policy in Australia, inaugural Higgins

Memorial Lecture, 15th May 1991. Published in the Canberra Bulletin of Public
Administration, no. 65, July 1991, p 16.

MacFarlane, I. (2000) Speech by Reserve Bank Governor, Mr Ian MacFarlane to the

House of Representatives Standing Committee on Economics, Finance and Public
Administration at Wagga Wagga in December 2000.

MacFarlane, I. (2001) Press release, Statement on Monetary Policy by the Governor Mr

Ian MacFarlane, 4th April 2001.

MacFarlane, I. (2002) What Does Good Monetary Policy Look Like? Governor of the
Reserve Bank of Australia, Mr Ian MacFarlane speech at the 12th Colin Clark Memorial
Lecture, University of Queensland, Brisbane, 21st August 2002.

RBA press release 14th August 1996. Statement on the Conduct of Monetary Policy,
Reported in the Reserve Bank of Australia Bulletin, September 1996 issue.

Cases cited

Jolley v Mainka (1933) 49 CLR 242.

Kilbourn v Thompson 103 U.S. 168, 19 of (1880).

Kirmani v Captain Cook Cruises Pty Ltd [No 1] (1985) 159 CLR 351.

Web sites

Australian Bureau of Statistics,

Australian Department of Foreign Affairs and Trade, www.

Australian Parliament House,

Organisation of Economic Co-operation and Development,

Reserve Bank of Australia web site,

World Trade Organisation web site,

Glossary of terms

Anthropology is social science, closely linked to sociology, which concentrates (though
not exclusively) on the study of traditional cultures ~ particularly hunting and gathering
and horticultural societies ~ and the evolution of the human species.

In establishing the validity of legal rules, one must take into account the issue of co-
extensivity, that a rule is considered valid does not always mean that it is applicable as
well. Thus, applicability is not identical with validity. Applicable rules may stem from
three different sources ~ namely: the Federal norm system, the legislative powers vested
by States and the valid by-laws of local Councils.

The buying or selling of stocks or bills of exchange to take advantage of varying prices
in different markets.

Australian Prudential Regulation Authority (APRA)

The Australian Prudential Regulation Authority is the prudential regulator of the
Australian financial services industry. It oversees banks, credit unions, building
societies, general insurance and reinsurance companies, life insurance, friendly
societies, and most members of the superannuation industry. APRA is funded largely by
the industries that it supervises. It was established on 1 July 1998 by the Australian
Prudential Regulation Authority Act and served as an instrument to free the RBA from
regulating the banking industry.

Breakaway gap
A gap in prices that signals the end of a price pattern and the beginning of an important
market move.

Bureaucracy is a formal organisation marked by a clear hierarchy of authority, the
existence of written rules of procedure, staffed by full-time salaried officials, and
striving for the efficient attainment of organisational goals. Bureaucratisation refers to
the tendency of bureaucracies to refine their procedures to ever more efficiently attain
their goals. More generally, refers to the process of secondary organisations taking over
functions performed by primary groups.

Capital account
The capital account is a ledger which records the flow of investment into and out of a
country. Goods and services are recorded on the current account. To off set any
imbalance in the balance of payments, a deficit in current account must be counter
balanced with an injection into the capital account. This means when Australia spends
more than it earns at the international level, it must make up that difference by
borrowing from the rest of the world.

Capital flow
A capital flow is the term given to the inward or outward flow of investment capital
from one nation to the rest of the world. They are either, stable, positive or negative.

Capitalism is an economic system based on the private ownership of the means of
production and distribution in which the goal is to produce a profit.

Those who own companies, or stocks and shares, using these to generate economic
returns or profits.

A cause and effect relationship exists wherever a change in one variable (the
independent variable) induces change in another (the dependent variable). Causal
factors in sociology include individual motivation as well as many external influences
on human behaviour that often go unrecognised.

Central Banks
Central banks have for almost a century been the worlds dominant issuers of money.
The turning point was 1914. It was the start of the First World War, during which
almost all European Governments and some Governments elsewhere established
comprehensive controls to mobilise their economies for the conflict. The dominance of
central banking in monetary theory is even older than its dominance in monetary

The idea of a central bank originated in Britain in the early 1800s among a group of
economists known as the Currency School. They had great political influence and
pushed for reform. The turning point was 1844, when the British Parliament elevated
the Bank of England into a full-fledged central bank by in effect granting it a monopoly
of further issues of notes (paper money) in England, Wales, and Scotland. The grant
came after a vigorous intellectual debate on the merits of monopoly versus competition
in issuing notes. The Bank Act of 1844 converted the Bank of England into a Central
Bank. Because Britain was the most economically advanced country of the time, its
example was influential, and over the period of a century many other countries imitated
the British legislation. Only a few countries, mainly in Europe, had central banks prior
to the twentieth century. Central banking did not become an integral part of the
Australian economy until the period after Federation with the formation of the
Commonwealth Bank in 1911.

Today a typical central bank is a wholly Government owned body, separate from the
Treasury, that has a monopoly of issuing notes (paper money) and coins. It usually has a
high degree of discretionary power in that it is not constrained by monetary rules, such
as a binding commitment to maintain a particular exchange rate nor is it pressured to
bow to the whims of political manipulation.

Civil Rights
Civil Rights are the legal rights held by all citizens in a given State.

Cognition is the human thought processes of perception, reasoning and remembering.

Colonialism is the process whereby nations establish their political and economic rule
over less powerful nations.

Communism is a set of egalitarian political and economic ideas associated with Karl
Marx in which the means of production and distribution system would be owned by the
community. Communism as developed by Lenin and institutionalised throughout
Eastern Europe up until 1990 bore little resemblance to Karl Marxs vision.

A community is a group of people who share a common sense of identity and interact
with one another on a sustained basis.

Conformity is human behaviour which follows the established norms of a group or
society. The bulk of human behaviour is of a conforming nature as people accept and
internalise the values of their culture or subculture.

A Constitution can be described as a mode of operation by which a society derives its
formal character. Constitutions are usually written documents outlining the foundation
of legitimate laws with in a specified environment. Not all Constitutions are written
however ~ even societies that function without documents have traditional methods of
communicating their communitys values and objectives. Most countries today have
devised a basic set of principles by which they feel best serves their political existence.
This is expressed in the form of a written document called a constitution.

Cultural Transmission
Cultural Transmission is the socialisation process whereby the norms and values of the
group are internalised by individuals.

Culture is the term given to expressing the symbolic values, habits, norms and material
aspects shared by a given group. Cultural universals are values or practices shared by all
human cultures.

Currency includes notes, coins, postal notes, money orders, bills of exchange,
promissory notes, drafts, letters of credit and travellers cheques payable or expressed in
Australian money, and also includes rights, and instruments of title, to Australian

Current account
The current account is Australias bank account with the rest of the world. It is
managed through the World Bank as a ledger. The current account indicates whether
Australia is spending more than it earns from the other countries it trades with. If
Australia earns more on exports than it spends on imports the current account is in
surplus. Conversely if Australia earns less from exports and spends more on imports the
current account is a deficit.

The quantity of a commodity that buyers are willing to purchase from the market at a
given price.

Democracy is a form of government that recognises the citizen as having the right to
participate in political decision-making, or to elect representatives to government

Economic interdependence
Economic interdependence is the fact that in societies with a high division of specialised
labour, individuals depend more on others to produce most of the goods they need to
sustain their lives.

Empiricism is the name of a broad tradition in Western philosophy. The term comes
from the Greek empeiria, meaning experience. The basic thesis of empiricism is that
legitimate human knowledge arises from what is provided to the mind by the senses or
by introspective awareness through experience. Most empiricists do not consider
knowledge gained through the imagination, authority, tradition, or purely theoretical
reasoning legitimate. Hence, they tend to regard traditional claims to knowledge in such
fields as art, morality, religion, and metaphysics as unverifiable.

Epistemology is the branch of philosophy that studies the nature and limits of
knowledge; it examines the structure, origin, and criteria of knowledge. Epistemology
also deals with a number of related problems: sense perception, the relation between the
knower and the object known, the possible kinds of knowledge and the degrees of
certainty for each kind of knowledge, the nature of truth, and the nature of and
justification for inferences. The word epistemology comes from the Greek words
episteme (knowledge) and logos (theory). A common definition of epistemology is
the theory of knowledge.

An ethnic group is one of a common cultural identity, separating them from other
groups around them. Ethnocentrism is the tendency to judge other cultures by the
standards ones own culture.

Fiat money
Fiat money is an intrinsically worthless or almost worthless commodity that serves the
function of being an accepted medium of exchange. Example; paper with pictures and
numbers printed on it. The value of fiat money is not linked to any amount of gold or
silver held at a nations central bank. It is accepted as a medium of exchange purely by
its convenience and by the faith that a population puts in it.

Fiscal policy
Fiscal policy is the Governments use of the Budget to achieve its economic
management goals. This is done through revenue collection and government spending.

Forward contract
A private agreement between buyer and seller for the future delivery of a commodity at
an agreed price.

Free banking
A free banking system is one in which money and credit are supplied competitively;
ideally, competition extends to the monetary standard itself ~ ie; fiat money with an

inflation-targeting rule. Various forms of free banking exist in about 70 countries,
including Australia.

Fundamental analysis
The study of supply and demand information to help project futures prices.

A term used to designate all contracts covering the purchase and sale of financial
instruments or physical commodities for future delivery, at a specified price, on a
specified date conducted through a commodity futures exchange.

Futures contract
A standardised agreement, traded on a futures exchange, to buy or sell a commodity at a
specified price at a date in the future. Specifies the commodity, quality, quantity,
delivery date and delivery point or cash settlement.

Globalisation is the term used to express the development of extensive worldwide
patterns of economic relationships between nations, firms and individuals.

Gross Domestic Product (GDP)

Gross Domestic Product, or GDP for short, measures the value of a nations output of
goods and services for some period of time ~ usually a year. It is not the only measure
of output, but the GDP has become a favourite among economists because it is the most
comprehensive of output measures. In arriving at GDP, the Australian Bureau of
Statistics is careful not to double count transactions. If it counted the sale of steel to
General Motors Holden from BHP and also the value of the cars that GMH produced, it
would count the steel twice, once in an unfinished form, and once in a finished form. In
practice it avoids double counting by only including the value added at each stage of
production. Value added is sales minus the cost of raw materials and unfinished goods.

Grundnorm is a German word. It was used extensively by twentieth century legal
philosopher Hans Kelsen to depict the root source of valid law. It has been translated
into English as basic norm but this term looses some of the essence of the real meaning.
The grundnorm (or basic norm) of a legal system can be thus described as the valid
founding reality of commanding rules to which a society conforms. It is the norm from
which all other norms derive their legitimacy.

The purchase or sale of a futures contract as a temporary substitute for a cash market
transaction to be made at a later date. Usually it involves opposite positions in the cash
market and futures market at the same time.

Hermeneutic is an adjective. It describes processes concerning interpretation. It is the
ability by people within the system, to interpret and understand social actions and
institutions because they possess special knowledge. They can interpret the symbolic
language (contained usually within law or religion) which permits them to discover a
universal understanding or perhaps even deepen the understanding that they already
have, without denying the capacity of reason, to form true, conceptual propositions
about law and the validity of rules.

The continuous and permanent rising of the general price level of goods and services
within an economic zone.

Interest is an amount payable to an investor as a percentage of the amount of money
borrowed. Within the public domain, Part V of the Banking Act 1959 regulates banking
by making provision for the protection of the currency and the public credit of the
Commonwealth. Under s 50 (1) The Reserve Bank may, with the approval of the
Treasurer, make regulations for or in relation to the control of control of interest rates
payable to or by Authorised Deposit Institutes (ADIs).

International Gold Standard

The international gold standard was a system of global finance where each country
conducted business using the value of gold as the measure of their currencys worth.

Intervention is the interference by the central bank on the market for foreign exchange
trading. The central bank may influence the exchange rate of the domestic currency by
either selling or buying foreign exchange in order to reverse the pressure of undesirable
valuation. However countries that have floating currencies tend to let market forces
determine the true value of a currency.

Laissez-faire is French. It is a transitive verb meaning ~ to let do freely. It is one of the
main doctrines of capitalism that asserts that Government should not interfere with
commerce. It espouses a free enterprise economic system devoid of government
intervention, which allows market forces to determine the operation of business and

The generally held belief that a particular social institution is just and valid. The term
legitimacy is used in relation to legal systems as well as individual norms and can be
understood and defined in different ways. The basic import of legitimacy, however is
tied to the term acceptance ~ acceptance, on the part of a person. Legal rules can be
legitimised from the internal legal point of view, which means that the source of the
validity of the rules is established within the framework of a given system of norms.
Legal rules can also be legitimate in the sense of being justified. In conceiving given
rules as legitimate, one falls back on certain ideas and values such as, the principal of
democracy or justice or common interest.

The use of a small amount of assets to control a greater amount of assets.

Liberal Democracy
Liberal Democracy refers to those societies based on some form of democracy coupled
with capitalism.

Liberalism is a political philosophy that emphasises individual freedom and arose in
Europe in the period between the Reformation and the French Revolution. Liberalism

sought to expand civil liberties and to limit political authority in favour of constitutional
representative government and promoted the rights to property and religious toleration.
In the economic sphere, classical liberalism was opposed to direction by the State,
arguing that the forces of the marketplace were the best guide for the economy. In its
full flower in the nineteenth century, liberalism stood for limited government with a
separation of powers among different branches such as the legislative, executive, and
judicial and for economic free enterprise. All liberals unite on the rule of law ideal. The
rule of law expresses, amongst other things, the liberal suspicion of State authority by
requiring that government takes place under law and through law.

Monetary targeting
Monetary targeting is a process by which the central bank controls the international
value of its currency by monitoring the supply and demand for the currency in the
international market. This affects the amount of currency in circulation in the domestic
setting so the central bank either pushes money into the international economy or
withdraws it to maintain a specific price. It does this by either selling or buying the

Money encompasses a number of different functions that correspond generally to the
classic uses of money as a medium of exchange, a unit of account, a standard of
deferred payment and a store of value. Money can have various meanings so it is
important to distinguish between each type.

Narrow money (M1)

Narrow money includes currency, i.e. banknotes and coins, as well as balances
which can immediately be converted into currency or used for cashless
payments, i.e. overnight deposits.

Intermediate money (M2)

Intermediate money comprises narrow money (M1) and, in addition, deposits
with a maturity of up to two years and deposits redeemable at a period of notice
of up to three months. Depending on their degree of moneyness, such deposits
can be converted into components of narrow money, but in some cases there
may be restrictions involved, such as the need for advance notification, delays,
penalties or fees. The definition of M2 reflects the particular interest in
analysing and monitoring a monetary aggregate that, in addition to currency,
consists of deposits which are liquid.

Broad money (M3)

M3 comprises M2 and marketable instruments issued by the MFI sector. Certain
money market instruments, in particular money market fund (MMF) shares/units
and money market paper, and repurchase agreements are included in this
aggregate. A high degree of liquidity and price certainty make these instruments
close substitutes for deposits. As a result of their inclusion, M3 is less affected
by substitution between various liquid asset categories than narrower definitions
of money, and is therefore more stable.

Moving Peg
A moving peg is a process by which one nation tries to stabilise the value of its currency
to that of another nation ~ always a more dominant one. The country doing the pegging

monitors the value of the stronger currency and follows the either upward or downward
movement in value.

Natural law
Natural law is the concept of a body of moral principles ~ a system of justice, that is
common to all humankind and, as generally posited, is recognisable by human reason
alone. Natural law is therefore distinguished from ~ and provides a standard for positive
law, the formal legal enactments of a particular society. Derived from the natural-law
concept is the theory that individuals have inalienable natural rights, such as the right to
life, liberty and property.

Norms are rules and expectations of conduct which either prescribes a given type of
behaviour, or forbids it. In the context of Hans Kelsens legal positivism, it is a legal
rule. The grundnorm (or basic ~ fundamental norm) is the norm from which all other
norms derive their legitimacy. A norm can be derived from customs, contracts, judicial
decisions and statutes.

Australian note means a note issued under the Australian Notes Act 1910, under Part
VII of the Commonwealth Bank Act 1911, under Part VI of the Commonwealth Bank
Act 1945 or under Part V of the Reserve Bank Act 1959. Section 34 of the Reserve Bank
Act authorises the issue, re-issue and cancellation of notes. Properly issued notes are
legal tender.

The right, but not the obligation, to sell or buy the underlying (in this case, a futures
contract) at a specified price within a specified time.

Participatory Democracy
Participatory Democracy is a system of democracy in which all members of a group or
community participate collectively in major decisions. Most nation States today are too
large and complex for participatory democracy to be a feasible form of government
therefore they employ a system of representative government.

A peg is a conceptual method of tying the value of one currency to that of another
currency. Naturally the other currencys value may change, so in order to maintain the
price purchasing parity the second currency will change its value in line with that of the
stronger currency. The process of following the value of another currency is called a
moving peg.

Phenomenology is a school of philosophy whose principal purpose is to study the
phenomena, or appearances, of human experience while attempting to suspend all
consideration of their objective reality or subjective association. The phenomena studied
are those experienced in various acts of consciousness, mainly cognitive or perceptual
acts, but also in such acts as valuation and aesthetic appreciation.

Positivism is a philosophical position according to which there are close ties between
the social and natural sciences, which share a common logical framework characterised

by an emphasis upon science and scientific method as the best sources of knowledge ~ a
sharp distinction between the realms of fact and value, and a strong hostility toward
religion and traditional philosophy ~ especially metaphysics. Positivism was first
introduced into the philosophical vocabulary in the early nineteenth century by Comte
De Saint Simon. The movement had great influence in legal philosophy well into the
twentieth century.

The amount agreed upon between the buyer and seller for the purchase or sale of a
futures option ~ the buyer pays the premium and the seller receives the premium. The
excess of one futures contract price over that of another or over the cash market price.

Price stability
Economical environment described with the invariableness of price level or with very
low inflation (0-2%), where the inflation factor can be almost disregarded when making
consumption and investment decisions.

Purchasing Power Parities (PPPs)

Purchasing Power Parities are rates of currency conversion that equalise the purchasing
power of different currencies by eliminating the differences in price levels between
countries. In their simplest form, PPPs are simply price relatives which show the ratio
of the prices in national currencies of the same good or service in different countries.
The major use of PPPs is as a first step in making inter-country comparisons in real
terms of gross domestic product (GDP) and its component expenditures.

Ready payment
In the case of noble metal (gold or silver) based monetary systems, ready payment
referred to the central banks obligation, to change the money-substitutes (ie paper
notes) into noble metal.

Real interest
Real interest is the difference between the nominal interest rate and inflation. The
measure of real interest affects the consumer, saving and investment decisions, and
through these affects wages.

Realism is a belief that universals exist independently of the particulars that instantiate
them. It incorporates the doctrine that universals or abstract concepts have an objective
or absolute existence. It is the practice of accepting a situation as it is and dealing with it
accordingly. Realists hold that each general term signifies a real feature or quality,
which is numerically the same in all the things to which that term applies representing
things in a way that is accurate and true to life. Thus, opposed to nominalism.

Representative democracy
Representative democracy is based on a system of government where voters
democratically elect politicians to represent their interests.

Reserve account
A Reserve account is a banking institutions account with the RBA, the end-of-day
balance of which counts towards fulfilment of the institutions reserve requirement.

Reserve Bank of Australia (RBA)
The Reserve Bank of Australia is Australias Central Bank. The RBA derives its
authority from the Reserve Bank Act 1959 (Commonwealth) however, the Act was
amended in 1996 when the Howard Government issued the mandate to the RBA to
maintain inflation within the band of 2 to 3 per cent. The RBA achieves this by
monitoring and controlling inflation via the process of monetary policy. The RBA
issues all notes and coins in Australian circulation.

Reserve ratio
Reserve ratio is the percentage specified in Part 3 of the Payment Systems (Regulation)
Act 1998 for any particular item in the reserve base. It is the amount of funds a
commercial bank must deposit with the RBA as a ratio. The amount is determined as a
percentage of funds the banks hold as deposits from customers.

Reserve requirement
Reserve requirement is the requirement for financial institutions to hold minimum
reserves in reserve account with the RBA.

The amount of money remaining from income of the household after consumption
expenses have been deducted. Nationally it is calculated by the system of the national
invoices minus costs.

To trade for small gains. Scalping normally involves establishing and liquidating a
position quickly, usually within the same day, hour or even just a few minutes.

Property which is pledged as collateral for a loan. Or an investment instrument, other
than an insurance policy or fixed annuity, issued by a corporation, government, or other
organisation which offers evidence of debt or equity. These include any note, stock,
treasury stock, bond, debenture, certificate of interest or participation in any profit-
sharing agreement, transferable share, investment contract, voting-trust certificate,
certificate of deposit, or any put, call, straddle, option, or privilege entered into on a
national securities exchange relating to foreign currency. but shall not include currency
or any note, draft, bill of exchange exceeding nine months.

Seigniorage is the process of making a profit by issuing currency. Historically this was
done when a Government issued coins rated above their intrinsic value. Today fiat
money is employed to achieve the same result.

Settlement price
A figure determined by the closing range that is used to calculate gains and losses in
futures market accounts, performance bond calls and invoice prices for deliveries.

Small open economy

A country which is price-accepting on its export and import markets; is usually a small
country that does not influence global price levels. Eg Australia.

Social Contract Theory
Social Contract Theory is the view that persons moral and/or political obligations are
dependent upon a contract or agreement between them and the State to form society.
Social Contract Theory is associated with modern moral and political theory and is
given its first full exposition and defence by Thomas Hobbes. After Hobbes, John
Locke and Jean-Jacques Rousseau are the best known proponents of this enormously
influential theory.

Socialism is an economic system in which some of the means of production and
distribution of goods and services are publicly owned.

One who attempts to anticipate price changes and, through buying and selling futures
contracts, aims to make profits. Does not use the futures market in connection with the
production, processing, marketing or handling of a product. The speculator has no
interest in taking delivery.

The application of logic, reason and knowledge to the problems of exploiting raw
materials from the environment. Social technologies employ the same thought
processes in addressing problems of human organisation. Technology involves the
creation of material instruments (such as machines) used in human interaction with
nature as well as social instruments (such as bureaucracy) used in human organisations.

Time series
A time series is a set of values recorded over time. The values can relate to any set of
data and can be represented in graphical form plotted on the Y vertical axis. Time is
plotted on the X horizontal axis.

A person is said to be unemployed when; they dont have a job, are able to work, are
actively searching for a job, or if they found a job, one in which they start work in over
30 days time.

Unemployment Rate
The rate of unemployment is the total number of unemployed persons in an economy
expressed as a percent of the total working population.

Utilitarianism is a moral theory according to which an action is right if and only if it
conforms to the principle of utility. Jeremy Bentham formulated the principle of utility
as part of such a theory in his Introduction to the Principles of Morals and Legislation
in 1789. An action conforms to the principle of utility if and only if its performance will
be more productive of pleasure or happiness, or more preventive of pain or unhappiness,
than any alternative. Instead of pleasure and happiness the word welfare is also
apt: the value of the consequences of an action is determined solely by the welfare of

Utility is that property in any object, whereby it tends to produce benefit, advantage,
pleasure, good, or prevent the happening of mischief, pain, evil, or

Utilitarianism is a theory in moral philosophy by which actions are judged to be right or
wrong according to their consequences. Utilitarianism had its origins among the British
philosophers of the seventeenth and eighteenth centuries. A dictum made famous by the
utilitarian Jeremy Bentham is that a system should seek the greatest happiness of the
greatest number. Utilitarianism represents an extension into moral theory of an
experimental, scientific mode of reasoning because it involves the calculation of causal
consequences. Utilitarians must explain which kinds of consequences are to be sought
or avoided. Utilitarians who equate happiness with pleasure are termed hedonistic
utilitarians; those who regard happiness as incapable of reduction to any single notion
such as pleasure are called ideal or pluralistic utilitarians.

An annualised measure of the fluctuation in the price of a futures contract. Historical
volatility is the actual measure of futures price movement from the past. Implied
volatility is a measure of what the market implies it is, as reflected in the options price.
Volatility can also be used as a measure to describe the variation in value of currency
exchange rates.

Wrought gold
Wrought gold means gold and gold alloys which on view have apparently been worked
or manufactured for professional or trade purposes and includes the waste products
arising from the working or manufacturing of gold and gold alloys.