BANKING BANKING POWERS IN PEACETIME: "BANKING":REGULATION OF INTEREST RATES, CREDIT POLICY, OVERSEAS EXCHANGE AND INVESTMENT, TRADING BANK RESERVES: FINANCIAL INSTITUTIONS OTHER THAN BANKS: POWER TO REQUIRE TRADING BANKS TO DEPOSIT SURPLUS INVESTIBLE FUNDS WITH COMMONWEALTH BANK: REQUIREMENT THAT TRADING BANKS MAINTAIN MINIMUM RESERVE AT COMMONWEALTH BANK: WHETHER ACQUISITION OF PROPERTY
CONSTITUTION s 51(i), (ii), (iv), (xii), (xiii), (xvi), (xx), (xxix), (xxxi), (xxxix): BRITISH NORTH AMERICA ACT 1867 (30 Vict. c. 3) s 91(15), (16), (19): ACTS INTERPRETATION ACT 1901 s 15A: MONEYLENDERS ACT 1927 (U.K.) (17 & 18 Geo. V c. 21) s 4(3): MONEY LENDERS ACT 1938 (Vic) s 24(2): CO-OPERATION ACT 1923
- The Treasurer has asked a number of questions relating to the constitutional powers of the Commonwealth, in time of peace, with respect to banking and certain other cognate financial matters. To answer these questions has required extensive investigations, not only into some more or less uncharted fields of Australian constitutional law, but also into some branches of the constitutional law of the United States and Canada. It will be necessary to state my opinion at some length. I shall first formulate the questions involved in the Treasurer’s inquiries and, after making some preliminary general observations on the banking power in the Commonwealth Constitution, answer each question in turn.
- The questions asked by the Treasurer relate to the Commonwealth’s powers, in time of peace, to regulate four main matters:
- Interest rates
- Credit policy
- Overseas exchange and investment
- Trading bank reserves
- The particular questions raised by the Treasurer may, I think, be stated thus:
- Interest rates–
- How far does the banking power enable the Commonwealth to control the interest rates:
- paid on deposits,
- charged on advances,
by banks strictly so called, by other financial institutions, or generally?
- How far can the banking power be supplemented, as regards the control of interest rates, by other constitutional powers?
- If the Commonwealth purported to extend its control to institutions or transactions that are held by the Courts to be outside the area of the Commonwealth’s authority, would the validity of the legislation as a whole be imperilled?
- Credit policy:
- How far does the banking power enable the Commonwealth to control the general policy to be followed by trading banks in making advances?
- How far can other constitutional powers be used to supplement the banking power, in relation to the credit policy followed by other financial institutions?
- Exchange control:
- How far can the Commonwealth continue in time of peace the measures of control now included in the National Security (Exchange Control) Regulations? In particular, how far can the Commonwealth continue in time of peace the following list of measures, deemed necessary for a complete control of overseas exchange:
- control of exports, including not only goods but securities;
- control of both the sale and the export of gold;
- control of the purchase, sale, borrowing, lending or exchanging of foreign currency by banks, by financial and trading institutions, and by other members of the community, including control of the exchange rate;
- control of contracts (for the purchase of goods or otherwise) whereby a right to receive payment is established in favour to a non-resident of Australia;
- control of the despatch of currency (Australian and foreign) from Australia;
- control of payments by residents not included in (c) above, in connexion with the receipt of payments or the acquisition of property abroad;
- control of dealings in Australia with the assets of non-residents;
- control of dealings in, and power to acquire, foreign currency accruing abroad to residents of Australia;
- similar control with regard to other assets held abroad by other residents of Australia?
- Trading bank reserves:
- Can the Commonwealth require trading banks to deposit with the Commonwealth Bank their surplus investible funds, as is now done under the ‘special account’ system established by the National Security (War-time Banking Control) Regulations?
- Does the exercise of this power involve an acquisition of property within the meaning of paragraph (xxxi) of section 51 of the Constitution?
- If so, are the terms provided by the War-time Banking Control Regulations ‘just terms’ within the meaning of paragraph (xxxi)?
- Would the same considerations apply to a requirement that the trading banks should maintain a prescribed minimum reserve at the Commonwealth Bank?
General observation on the banking power
- The Commonwealth’s power with respect to banking is contained in paragraph (xiii) of section 51 of the Constitution, as follows:
(xiii) banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money …
Apart from the express references to State banking, this paragraph is a verbatim copy of paragraph (15) of section 91 of the Canadian Constitution (British North America Act 1867). It may be noted that in the Canadian Constitution paragraph (15) is supplemented by paragraph (16)–‘Savings Banks’–and paragraph (19)–‘Interest’. Neither of these latter provisions found a place in the Commonwealth Constitution. In the United States, Congress has no express powers with respect to banking. In the United States, therefore, the network of national trading banks and of Federal Reserve Banks rests upon the general powers such as those relating to currency, taxation, and commerce.
- In some respects, the banking power may perhaps be aided and supplemented by resort to some of the other powers in relation to financial matters. Among these are the following paragraphs of section 51:
(i) trade and commerce with other countries and among the States;
(iv) borrowing money on the public credit of the Commonwealth;
(xii) currency and coinage;
(xx) foreign corporations, and trading of financial corporations formed within the limits of the Commonwealth.
In every case there must also be considered the ancillary or incidental powers, whether implied on ordinary common law principles or regarded as expressly contained in paragraph (xxxix).
- The meaning of the terms used in the Constitution is to be ascertained by reference to their signification in 1900. This does not mean that the Commonwealth’s banking power is limited in all respects to those practices with were ordinarily carried on by banks in 1900. Applying to ‘banking’ what O’Conner J. said of ‘trade marks’ in the Union Label case in 1908 (6 C.L.R. 457, 534–5), the scope of the power is to be found by ascertaining what were the essential characteristics of banking in Australia at the time when the Constitution was passed, disregarding all conditions, qualifications and attributes which were not of its very nature and essence. The power will thus include any business that possesses those characteristics, and all the activities incidental to it, whether known in 1900 or not.
- ‘Banking’ is admittedly a vague word. There has been no significant judicial interpretation of section 91(15) of the Canadian Constitution. Varying definitions of ‘banking’, or of the related words ‘bank’ and ‘banker’, are to be found in numerous statutes, but they all have to be used with extreme caution, in the light of the context and objects of the particular Act concerned. In the Australian Constitution, the word is presumably used in its ordinary modern popular sense. This, according to the Oxford English Dictionary, is ‘the business of a banker; the keeping or management of a bank’. A ‘bank’ is defined as follows:
An establishment for the custody of money received from or on behalf of its customers. Its essential duty is the payment of the orders given on it by the customers. Its profits arise mainly from the investment of the money left unused by them.
- The clearest judicial indication of the scope of the word ‘banking’ in section 51(xiii) of the Constitution is, I think, to be found in the judgment of Isaacs J. (concurred in by a majority of the High Court) in State Savings Bank of Victoria v. Permewan Wright & Co Ltd (1914) 19 C.L.R. 457, at pp. 470–471. The question, in that case, it is true, was whether the State Savings Bank was entitled to the protection given by the Bills of Exchange Act to a ‘banker’ who in good faith and without negligence receives payment of a crossed cheque for a customer. The extent of the banking power was not expressly involved at all. Nevertheless, I think the reasoning of Isaacs J. is precisely applicable to the interpretation of section 51(xiii). Asking himself what constitutes ‘the business of a banker’ or ‘the business of banking’, Isaacs J. said:
The fundamental meaning of the term is not, and never has been, different in Australia from that obtaining in England. Various writers attempt various definitions, more or less discordant, and many of them referring to functions that are now very common and convenient, and even prominent, as if they were indispensable attributes. The essential characteristics of the business of banking are, however, all that are necessary to bring the appellants within the scope of the enactments; and these may be described as the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilisation of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is, in effect, a financial reservoir receiving streams of currency in every direction, and from which there issue outflowing streams where and as required to sustain and fructify or assist commercial, industrial or other enterprises or adventures.
If that be the real and substantial business of a body of persons, and not merely an ancillary or incidental branch of another business, they do carry on the business of banking. The methods by which the functions of a bank are effected–as by current account, deposit account at call, fixed deposit account, orders, cheques, secured loans, discounting bills, note issue, letters of credit, telegraphic transfers, and any other modes that may be developed by the necessities of business–are merely accidental and auxiliary circumstances, any of which may or may not exist in any particular case. I agree as to this with what was said by Fitzgibbon L.J. in In re Shields’ Estate (1901) 1 I.R., 172, at p. 198.
Bankers are not bound by law to open current accounts. They may confine themselves, if they wish, to what are known as deposit accounts, and make those deposits repayable at call or at stipulated times, and withdrawable as a whole or in part as may be agreed on. The method of withdrawal may be conditioned to be by personal application, or by written order. It is all a matter of contract.
- I emphasise the two main points made by Isaacs J. in this exposition of what is meant by ‘the business of a banker’:
- The primary and essential characteristic of the business of a banker is that he trades in the money of depositors. Both etymologically and historically, a ‘bank’ is first and foremost a place for the deposit of money by the public.
- A banker is a trader in money. An institution whose main or substantial business is not that of a dealer in money is not carrying on the business of a banker merely because it performs one or more functions that are ordinarily carried on by banks.
- Halsbury’s Laws of England (2nd Edition Vol. i, pp. 783, 793–4 note (f)), while admitting that it is not clear what precisely constitutes banking business, adopts a narrower test than that propounded by Isaacs J. The view taken in Halsbury is that ‘probably the real test is the receiving of money to be withdrawn by cheque’. In this view an ordinary savings bank would not be held to be carrying on ‘the business of a banker’. The definition in Halsbury was adopted by Griffith C.J. in Savings Bank of Victoria v. Permewan Wright (1914) 19 C.L.R. 457, 466. But this was a dissenting view, and was expressly rejected by the majority of the Court. In my opinion, therefore, the Commonwealth’s banking power should not be regarded as limited to what may be called cheque-paying banks.
- Modern banks ordinarily carry on a number of activities which are conveniently associated with the business of banking, as thus described, but which strictly speaking do not form part of it. Thus in Halsbury’s Laws of England (2nd Edition Vol. i, p. 789 note (c)) it is said that ‘numerous other functions undertaken by modern bankers, such as payment of domiciled bills, custody of valuable discounting bills, stockbroking, executor and trustee business, trust corporation work, do not come within the strict definition of banking business’. No doubt the Commonwealth’s banking power would enable it to regulate these and other like activities, but only when carried on by banks, and also to decide what functions, incidental to banking business strictly so called, a bank may be permitted to carry on: First National Bank v. Fellows (1917) 244 U.S. 416.
- In my opinion the word ‘banking’, as used in the Constitution, denotes a nexus of financial transactions, based upon deposits of money by the public. The scope of the power cannot be ascertained by breaking up or analysing out what banks ordinarily do into a series of individual transactions, and assuming that the power attaches to each of those transactions, by whomever entered into. Lending money on security, for example, is an ordinary incident in the business of a banker. Many other institutions and persons are also engaged in the business of lending money on security. But that will not, of itself, show that they are carrying on the business of a banker, or are engaged in ‘banking’.
- A moneylender, in some jurisdictions, is expressly forbidden to hold himself out in any way as carrying on the business of banking: see Moneylenders Act 1927 (UK), section 4(3); Money Lenders Act 1938 (Vic), section 14(2). Similarly in New South Wales societies registered under the Co-operation Act 1923–1937, which include building societies, rural credit societies, and other organisations whose primary function is the making of loans to members, are expressly forbidden by section 67 of the Act to carry on the business of banking. The section adds a proviso expressly permitting a society to receive deposits if authorised by its rules. This section clearly implies that whereas to receive deposits of money from the public is to carry on banking business, to lend money on security is not. The statutes I have