The Bank Notes Act of 1910

Some recent discussion here on the ALS blog has centred around the issue of private currency, fractional reserve banking (FRB) and the historical role of gold within monetary systems. Whilst some of the associated questions will no doubt get rehashed again and again I would like to focus this article on what I think is the key obstacle to freedom when it comes to the question of private currency.

Currency comes in a multitude of forms. Some alternate categorisations that we might apply to currencies are:-

- Privately issued or Government issued.
- Fiat or Promisory
- Tangible or Electronic
- Paper or metallic

Perhaps the most familiar form of currency is the national fiat currencies that we encounter daily such as the plastic Australian notes we find in our wallets or the green paper notes that we call US dollars. Both of these are examples of currencies issued by governments where the value is determined by government monetary policy and market demand rather than via any contractual promise. As such they are known as fiat currencies.

Not all government issued currencies are necessarily fiat currencies. In earlier times many governments routinely issued currencies that entailed an explicit promise and they were in essence a contract between the holder of the currency and the issuer (in this case the government). The following picture shows an early US dollar that was promisory in nature and carries words that outline an explicit commitment to redeem the currency for some specific article. In this example the note carries the words: “This Certifies that there is on deposit at the Treasury of The United States of America One Dollar in Silver Payable to the Bearer on Demand”. So long as the term “One Dollar in Silver” means a specific weight of Silver (as in US law it once did) then such a note is not a fiat currency but a promisory note.

So a government issued currency need not be a fiat currency, even though pretty much every government issued currency today is. Private institutions can in theory also issue such promisory notes. The next images shows an historical example of a promise issue by “The City Bank of Sydney”.

This note promises to pay the bearer 20 Pounds on demand. At the time “20 Pounds” legally meant a particular quantity of gold coin.

However such paper promises will only function as a medium of exchange if they are transferable. If the promise is explicitly made out to a particular person, rather than to the bearer (holder) in general, then the item can not serve as a medium of exchange. A promise that is to a particular named party does not have any redemtion value to a third party and so it won’t circulate. The following images shows a modern example of a paper promise that won’t circulate because it is specific to a named party only.

The images shows a gold certificate issued by the Perth Mint which promised to pay a given amount of gold on demand. These Perth Mint certificates come in two forms, allocated metal or unallocated metal. However the certificate is to a named party and as such the certificate is not transferable and can not circulate or act as a medium of exchange.

In 1910 the Australian Federal Government passed several monetary reforms and one of these was know as “The Bank Notes Act of 1910″. Whilst the act does not prohibit private currency in Australia it does impose a 10% tax on redemption for all private currencies. Such a tax is prohibitive in nature and it effectively brought to an end the existance of privately issued currencies in Australia.

The most simple freedom orientated monetary reform that we could have in Australia would be to abolish “The Bank Notes Act of 1910″. It would not bring to an end the dominance of the fiat Australian dollar, nor reform the basis of monetary policy, but it would pave the way for private alternatives. It would not open a flood gate but it would leave the door slightly ajar. It is hard to see any more ambitious reform towards privatising money having any effect without this first basic step. In the monetary arena even such a basic level of freedom is rare in the world today but it does exist. The best precedent for such freedom comes from Scotland where today private banks still issue private promisory notes, payable to the bearer on demand and circulating as a functional alternate currency. Given the political will Australia could very easily make this quite minor technical adjustment and become one more niche of freedom in the world and present at least a modest reminder of the way a less centrally controlled world once worked.