Eco-Economy: Making Money in the 1980's

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New Zealand Banking Reform.

Making Money in the 1980's: How we got into this Financial Mess.

The New Zealand public deserves some answers from our Treasury and Reserve Bank officials. During the 1980's they presided over the asset-stripping of our country. First the private sector and then the public sector were taken over by a new breed of financiers, who profited by running productive New Zealand companies and government departments into the ground.

That was the free market reform of the 1980s, known as the great New Zealand experiment.

After fifteen years, and much suffering, we now deserve some answers from the reformers. Do they really believe that the reforms were successful?

ACT leader, Richard Prebble, has had the nerve to suggest that Finance Minister Michael Cullen should resign. No Richard, the damage was done by your hands. Richard Prebble should resign, and resign in shame, for the ideas that he represents and defends are now bankrupt. As John Kay noted, in the Financial Times, 30 August, the experiment was a failure. Stop already!

The centre of all the madness is the Reserve Bank and its inexcusable

mismanagement of the New Zealand dollar.

New Zealand Banking Reform recently attended a meeting with Michael Reddell, Chief Manager, Financial Markets Department of the Reserve Bank. Our objective was to get clarification on a number of basic questions.

NZ Banking Reform: Is it true that all NZ dollars are created under the authority of the Reserve Bank of New Zealand?

Reserve Bank: No.

NZ Banking Reform: Is it true the registered banks have created more than 98 percent of the NZ dollars in existence?

Reserve Bank: Yes, more the 98% of the M3 measure of New Zealand's money supply has been created by registered banks. M3 is the most commonly used broad measure of the money supply in New Zealand.

NZ Banking Reform: Is it true that registered banks create new money by ``lending'', by creating new debt?

Reserve Bank: Yes.

In other words, when you go to the bank to get a mortgage the bank is not getting the money from somewhere else. The bank simply creates the money, out of thin air, and starts charging you interest.

This system of banking has been around for a long time. In most countries, and in New Zealand until 1984, private banks were closely regulated and constrained in how much money they could create. The banking liberalisation of 1984 mainly consisted of allowing the banks to create as much money as they wanted.

One result was that the money supply grew by more than 20 percent per annum for the years 1984-1987.

Another result was the creation of a new class of affluent financiers and speculators. They used the new money to asset-strip the few basic industries in New Zealand, building to the crash of 1987. After '87 the target became public sector assets. Not only did they take control of almost all New Zealand corporations and institutions, but they also arrogantly mismanaged those assets, and eventually sold them cheaply to foreigners.

Inflation and interest rates were high and the majority of New Zealanders, who did not have buddies in the banks, struggled with the conditions. Farmers were forced off their land and public sector workers became an endangered species. Inflation ate away at real wages and benefits.

The mantra of the day was that we all needed to tighten our belts because there was simply not enough money. In fact, the money supply was growing at more than 20 percent!

In August 1984 M3 stood at NZ$ 19,672 million. By August 1987 the total had reached NZ$ 39,971 million. The money supply doubled in three years, compounding at a rate of 23 percent per annum. The economy didn't grow that fast!

In 1987 the Reserve Bank's ``Post Election Briefing Paper to the Minister of Finance'' makes this comment:

"The current monetary policy acts to fully fund the public sector net liquidity injections (of which the fiscal deficit, after asset sales, is the major component) by sales of public debt so that the Reserve Bank does not act to increase the money supply in order to finance the deficit."

Simply put, the Reserve Bank was advising the government that the budget deficit should be funded by borrowing from the banks and not by increasing the money supply. The basic principle invoked was that creating money out of nothing and spending it creates inflation, and that a responsible government should not do that. However the money that the government borrowed had simply been created by the private banks!

As the Reserve Bank was advising the government to cut back public spending, they watched, indeed cheered, as private banks created billions and allowed their Round Table associates to buy New Zealand.

The government was advised that funding the public sector by creating money was irresponsible because of the inflation that causes. However government borrowing creates just as much money. The only difference is that by borrowing the government is put into debt with the private banks and charged interest.

Moreover the Reserve Bank, while advising the government to cut back on money-creating deficit spending, allowed some in the private sector to create enormous amounts of money, take control of much of the productive sector and properly mess up the economy.

Clearly the Reserve Bank has some explaining to do.

Finlay Thompson

For..

The New Zealand Banking Reform Group

For more information phone: 021 1179 149

- New Zealand Banking Reform is a non-profit and non-party organisation dedicated to advocating financial reform in New Zealand. We need a financial sector that works for us, not one that exports profits and promotes asset speculation.

We believe that New Zealand needs a banking system where the power to issue is with the government and not with commercial banks. Today's international financial system has become a major threat to living systems around the earth. It generates levels of debt and interest on debt which enslave many national economies, including New Zealand. -