The government, which had been re-elected in 1946, had made it clear that it needed more effective control over the economy, especially so in the uncertain years of recovery from both world war and depression. Chifley saw nationalisation as a powerful instrument in postwar reconstruction. Ben Chifley in 1940, adjusting his Commonwealth Bank legislation. Mindful of the Depression's lessons, the then treasurer believed strongly in government control of banking. In March 1945, Chifley (as treasurer under John Curtin) introduced legislation to continue the wartime controls on the private banks, consolidate the Commonwealth Bank's role as a central bank and replace its board with a single governor and an advisory board of officials. The Banking Act 1945 and the Commonwealth Bank Act 1945 were very much the work of Chifley, who explained that the legislation was "based on the conviction that the government must accept responsibility for the economic condition of the nation ... the government has decided to assume the powers which are necessary over banking policy to assist it in maintaining national economic health and prosperity." It was a matter of deep faith for the homely Chifley. Then out of Parliament in 1936, the conservative Lyons government had appointed him to the Royal Commission on Monetary and Banking Systems, which studied the country's financial institutions in detail, and what he gleaned from that experience – especially in regard to the banks' actions during the Depression, contrary to government policy – made him a determined foe. Federal cabinet met in Canberra on a Friday, August 15, after which ministers were asked to remain in Canberra and return the next morning, a Saturday, to attend to "unfinished business". That business concerned a decision the High Court handed down two days earlier, upholding an appeal by the Melbourne City Council against a section of the 1945 legislation requiring, in the interest of monetary stability, all government and semi-government bodies to conduct their business with the then government-owned Commonwealth Bank.

The assembled ministers heard from the Attorney-General Bert Evatt about the implications of the decision, after which Chifley said there were two choices: swallowing the decision and waiting for the inevitable attack on the 1945 legislation by the private banks, or striking first by removing the potential challenge by nationalising the banks. Cabinet opted for the latter, perhaps unsurprisingly, as bank nationalisation was had been a plank in the Labor Party platform since 1921. Then prime minister John Curtin with this treasurer (later prime minister) Ben Chifley. Nationalising banks was long part of Labor's official policy. In one of the worst lapses of prime ministerial judgment in Australian history, the usually savvy Chifley let the public in on the news with nothing more than a terse 42-word announcement conveying the decision, but without any details, justification or explanation. The statement read: Banking nationalisation – proposed legislation

Cabinet today authorised the Attorney-General, Dr Evatt, and myself to prepare legislation for submission to the Federal Parliamentary Labour Party for the nationalisation of banking other than state banks, with proper protection for shareholders, depositors, borrowers and staff of private banks.

Short on substance and feebly defended, it sparked a political mobilisation of unprecedented scale – an assault from which the government did not recover. The manner of the announcement, without any attempt at justification, was seen by many as arrogance on Chifley's part. It delivered to the opposition a ready-made platform from which to attack the government and its "socialist" policies, an attack made even more potent within the context of the emerging Cold War, industrial unrest and the deliberately fanned fears of communist subversion. Opposition leader Robert Menzies likened the move to 'fascism', saying it was part of the 'coming dictatorship in Australia'. Within days, opposition leader Robert Menzies had organised a public meeting in the Sydney Town Hall and, in a speech, likened the move to "fascism", saying it was part of "the Chifley pattern" of "coming dictatorship in Australia". Chifley might have changed his approach, but a full month passed before he addressed it again publicly, merely reiterating his firm belief that the government must have full control over the economy, especially in times of great economic uncertainty. In October 1947, Chifley introduced his banking legislation to Parliament, arguing the control of money and credit was too important to be left in the hands of private banks. Government, he said, would be able to guard against both depression and inflation, and "open a long-locked doorway to the development of a monetary and banking system truly adequate to our national requirements and wholly devoted to the service of Australia".

The opposition attacks grew ever more shrill, with Menzies saying this opened up "a second battle for Australia", while Country Party leader Earle Page called it a "communist ramp" and warned, ominously, that his supporters might use "physical means" to oppose it. But before the legislation could be implemented, a challenge by the private banks to the High Court in 1948 was upheld on constitutional grounds and an appeal by the Commonwealth to the Privy Council was dismissed in 1949. In what amounted to another tactical miscalculation, a defiant Chifley retained the invalid acts on the statute books, much to the delight of Labor's opponents who continued to make capital from it. In a very real sense, Chifley, the government and Labor never regained the initiative after such an inept start. With Labor enjoying its longest term in office, and with a Labor government re-elected for the first time ever in 1946, it might have gone into the 1949 elections with a degree of confidence based on a substantial record of achievement, but the defeat on the banking issue dealt a severe blow, symbolically as well as politically. With the mood of the nation now uncertain and the peculiar circumstances of the elections fought, for the first time, for a greatly enlarged Parliament – the House of Representatives up to 123 from 75 and the Senate up to 60 from 36 – a great many unknowns clouded the horizon. The uncertainty was magnified by a range of postwar concerns and expectations that the expansionary 1949 budget brought into sharp focus.

The nation was still war weary, tired of austerity and impatient with rationing and controls. People also wanted to spend their accumulated savings on the new household goods appearing in stores, and the taxation burden was resented. Further, rising inflation was a problem: the consumer price index rose by more than 10 percentage points in 1949. Little wonder that Menzies' pledges to end rationing and "put value back in the pound" fell on such eagerly receptive ears. Labor's enemies, notably the banks and most big business but also the doctors who objected to subsidised medical care, were organising like never before; in all, they commanded a campaign war chest estimated at 10 times that of Labor. Prominent Catholics, like archbishop James Duhig in Brisbane, also campaigned, preaching that a vote for the "socialist" ALP was inconsistent with Catholic doctrines. The issues of bank nationalisation and medical benefits were not in themselves fatal flaws – indeed, they enjoyed strong support in Labor's heartland – but the cumulative effect, in tandem with the communist scare, deterred many lower middle-class swinging voters who had most likely voted ALP in 1943 and 1946. The association of Labor with wartime rationing and controls – and the banking move was depicted by its opponents as part of this – contrasted sharply with the carefully cultivated image of the young, energetic ex-servicemen the Liberal Party promoted, who preached the virtues of free enterprise. Loading That defeat in 1949 consigned federal Labor to the wilderness for a generation.