Policy Forum: The Murray Financial System Inquiry Central Banking for All: A Modest Case for Radical Reform Nicholas Gruen* 1. Introduction Despite much deliberation since the financial crisis, opinion remains divided—even amongst those of broadly similar ideologies—as to how to reform banking. As those debates continue and the Murray Financial System Inquiry proposes greater capital adequacy to increase resiliency and reduce moral hazard, this article applies more traditional principles of micro- economic reform to the banking industry. This gives us microeconomic reforms that will generate large efficiency gains. However, in doing so, our reforms also make a major contribution to enhancing banking stability and reducing moral hazard. 2. Competition and Competitive Neutrality In media, travel, entertainment, publishing and numerous other areas, large-scale producers once forced to deal through local intermedia- ries are now building direct relationships with customers over the Internet. However, although banks have used the Internet to extensively lower costs, there has been no structural disruption to the model of banking that emerged over the last two centuries, with commercial banks competing to retail liquidity and payments services that have been whole- saled to them on a more-or-less exclusive basis by the central bank. Given this industry structure as a public–private partnership, ideological preferences for or against governments over private firms, or vice versa, offer poor policy guidance. Rather than being ideological, at this level the policy challenge is the technocratic one of configuring the public– private partnership as felicitously as possible. In this regard, this article proposes nothing more radical than applying the principle of competitive neutrality, as has been applied in modernising so many other industries. The fraught history of banking has left us with a system that now so favours incumbents that the gains from resolute pursuit of well-designed reform are surprisingly large. 3. Retailing Central Banking Services 3.1 Savings and Payments Commercial banks like Westpac and National Australia Bank have exchange settlement accounts with the central bank—the Reserve Bank of Australia—giving them direct digital access to fiat money backed by government and an ability to risklessly transfer that money to others enjoying access to an exchange settle- ment account. Citizens and businesses could easily be provided with access to similar accounts with the central bank. Thus, provided they met the relatively small transactions costs associated with establishing and maintaining accounts with the central bank—which capa- bility could be contracted out by the central bank at low cost—citizens and businesses should be able to deposit money with the central bank and earn the same overnight cash rate available to banks. Likewise, depositors in such accounts should be able to directly pay their deposits to other account-holders with the central bank. The result would be a payments system which is simpler, cheaper, faster and * Lateral Economics, Victoria 3207 Australia; email <ngruen@lateraleconomics.com.au>. The Australian Economic Review, vol. 48, no. 2, pp. 205–8 °C 2015 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Wiley Publishing Asia Pty Ltd