Australian Dollar

Resilience of a Country and Its Currency

This special report from Brian Twomey brings light on the Australian Dollar since its creation, its evolution in time against other major currencies, how it went through an impressive 95-year downtrend, weathering every economic and currency storm over a 203 year period.

Australia: The Early Years

New South Wales was founded in 1770 by British explorer Captain James Cook, given its formal name and established as a legal colony in 1788. Later in 1863, the British separated the land to form further British colonies of Tasmania, South Australia, New Zealand, Victoria, Queensland and the Northern Territory. Founded inside the borders of New South Wales is todays capital, Canberra and most important city Sydney and would become vital components to Australias legal declaration as a nation in 1901, Australias central bank and AUD as a single free float currency. But the road for Australia to become the nation and currency we know today was not an easy journey.

Imagine the early explorers revelation when they found New South Wales and Australia in particular with an abundance of natural resources such as Coal, Iron Ore, Tin, Nickel, Bauxite, Copper and later Gold, Silver, Natural Gas and Petroleum. Iron Ore was the first suspected resource identified by Captain Cook when his compass failed in many locations. He also found not sand but deep black soil capable of producing any type of grain. The problem wasnt the natural resources but the system of trade.

Early year complications included not only lack of banks and a central bank but a system of exchange and various currencies employed as a system of trade found severe shortages because currencies left the territory by way of merchant ships and residents spent currency only when the need arose. Various currencies deployed between 1780s — 1814 was the Indian Rupee, Dutch Guilder, Spanish Real, British Sterlings (Silver Pennies as the formal name) and internal barter of natural resources: Copper and Rum. Early Notes of credit termed Police Fund Notes and backed by the English Treasury were issued by banks but fear was notes were subject to and found counterfeiters. Police Fund Notes were just one type of note issuance during this period and all found problems. Not until the Spanish Holey Dollar became the first ever minted and legislated coin did Australia enter a new period because confidence was instituted in a currency with not only Government backing but a fractional dimension was introduced to understand a currency value to formally trade goods.

The New South Wales government under then and well known Governor today, Lachlan Macquarie purchased 40,000 Spanish Reals due to the Reals world dominance then and cut the center from the Reals to double the number of available coins. The coins were formally minted and known as Holey Dollars with official Australia backing and began circulating in 1814. The center of the coins became known as Colonial Dumps and were fixed at 15 Pence per Dump while the official Holey Dollar was Fixed at 5 Shillings per Holey Dollar. Again, shortages developed due to increased natural resource trade and growing populations so in came the British as they imposed the Sterling Standard throughout its vast empire.

The British relieved the shortage pressures and 40 year attempt to institute an exchange system by legislating a Sterling currency in 1825 although accounts specify brisk trade of Sterling occurred as early as 1822. As the British introduced a new Gold piece and imposed the Gold Standard in 1821, all nations under its vast empire were subject to the new Sterling Standard. Australia was a prime target so approximately, 30,000 Pounds Silver arrived and it was here that began Australias long, long history as the Australian Pound that would span about 150 years. The term about was stated because evident throughout Australias history, legislation was always late to actual currency and other market developments. Changes in early Australia occurred as people movements or from those market participants that wished for adjustment so all demanded corrections from Australias government.

Quite evident from modern day Reserve Bank Governor speeches from 1960 to present day is Australia is not only a very conservative government traditionally but market adjustments occurred slowly and gradually with a need for consensus from government representatives. Consensus took time particularly in Australia as spirited political debate was always the norm and dates its history from its early beginnings. Legislation was never forward, it was always a response to market developments that were already implemented. With formal recognition of RBA true independence by Australias government in 1996 and with full powers to fully implement monetary policy independently, the ties between the RBA and Australias Treasury Department was severed.

From 1825 until the 1966 decimal system was introduced and Australias end to the Pound Fix in 1967, the Australian currency was known as the Australian Pound. Official RBA accounts always addressed the Fix end as 1971 but 1967 began actual market trading with price swings from 1967 onwards. AUD/GBP would share a 150 year relationship. Two problems existed however, Australia wasnt formally a nation and official adoption of a currency wasnt legislated. The impetus in this relationship was Gold.

Gold was found in the 1850s and prosperity came to Australia. Banks were formed, populations grew and Gold coins were minted backed by Gold in circulation. Australias Museum of Currency Notes reports the population tripled to 3 million between 1858 and 1889, and banks saw an explosive increase. In 1851, 8 trading banks (Commercial Banks, traditionally referred as trading banks by Australia) and 24 branches existed but by 1890, 33 new banks opened accompanied by branches that exceeded 1500. As depression occurred in the 1890s due from credit booms, many banks failed but reopened later after Australia became a nation in 1901.

As Australias six self governing British colonies voted and approved Federation, a constitution ratified by the English Parliament in 1900, a new nation was born in January 1901 when Australia adopted and called the new nation: Commonwealth of Australia. The new Commonwealth would include New South Wales, Tasmania, South and Western Australia, Queensland and Victoria. The first Parliament would convene May 1901. The first acts of the new parliament were adoption and issue of a currency and notes with full government backing.

AUD History

From 1910 to the 1983 free float, AUD journeyed through first the Fix to AUD/GBP, Fixed to USD, Fixed to its TWI (Trade Weight Index) then Fixed as a Crawling Peg to the TWI basket. Finally in 1983, the free float began and the free float was purely a clean float.

Formal adoption of AUD — adopted but not Fixed to GBP — occurred with passage of the Australian Notes Act in September 1910 and the Australian Notes Tax Act in October 1910. The first ever official notes were issued in 1913 based on the British system where 12 Pence = 1 Shilling and 20 Shillings equates to 1 Pound. A 10% per annum or as the legislation states 10 Pounds per Centum tax was imposed on all bank notes issued or reissued by any bank in the Commonwealth. Consistent with Section 51, Subsection 12 of Australias constitution, the powers to coin and issue was placed under government Treasury Departments. No mention of a central bank and it is here why the RBA was not only slow to develop but slow to gain its independence once it was formed due from Treasury constitutional dominance.