• Are We As Brave As Labour in the 1930s?

    New Zealanders like to think that we are, in most respects, up with – if not actually ahead of – the play.  Sadly, however, as a new government is about to emerge, there is no sign that our politicians and policymakers are aware of recent developments in a crucial area of policy, and that, as a result, we are in danger of missing out on opportunities that others have been ready to take.


    The story starts, at least in its most recent form, with two important developments.  First, there is the now almost universal recognition that the vast majority of money in circulation is not – as most people once believed – notes and coins issued on behalf of the government by the Reserve Bank, but is actually created by the commercial banks through the credit they advance, using bank entries rather than cash, and usually on mortgage.


    The truth of this proposition, so long denied, is now explicitly accepted by the Bank of England, and was – as long ago as 1994 – explained in a letter written by our own Reserve Bank to an enquirer, and stating in terms that 97% of the money included in the usually used definition of money known as M3 is created by the commercial banks.


    The proposition is endorsed by the world’s leading monetary economists – Lord Adair Turner, the former chair of the UK’s Financial Services Authority and Professor Richard Werner of Southampton University, to name but two.  These men are not snake-oil salesmen, to be easily dismissed.  They have been joined by leading financial journalists, such as Martin Wolf of the Financial Times.


    The second development was the use by western governments around the world of “quantitative easing” in the aftermath of the Global Financial Crisis.  “Quantitative easing” was a sanitised term to describe what is often pejoratively termed “printing money” – but, whatever it is called, it was new money created at the behest of the government and used to bail out the banks by adding it to their balance sheets.


    These two developments, not surprisingly, generated a number of unavoidable questions about monetary policy.  If banks could create billions in new money for their own profit-making purposes, (they make their money by charging interest on the money they create), why could governments not do the same, but for public purposes, such as investment in new infrastructure and productive capacity?


    And if governments were indeed to create new money through “quantitative easing”, why could that new money not be applied to purposes other than shoring up the banks?


    The conventional answer to such questions (and the one invariably given in New Zealand by supposed experts in recent times) is that “printing money” will be inflationary – though it is never explained why it is miraculously non-inflationary when the new money is created by bank loans on mortgage or is applied to bail out the banks.


    But, in any case, the master economist, John Maynard Keynes, had got there long before the closed minds and had carefully explained that new money could not be inflationary if it was applied to productive purposes so that new output matched the increased money supply.  Nor was there any reason why the new money  should not precede the increased output, provided that the increased output materialised in due course.


    Those timorous souls who doubt the Keynesian argument might care to look instead at practical experience.  Franklin Delano Roosevelt used exactly this technique to increase investment in American industry in the year or two before the US entered the Second World War. It was that substantial boost to American industrial capacity that was the decisive factor in allowing the Allies to win the war.


    And the great Japanese (and Keynesian) economist, Osamu Shimomura, (almost unknown in the West), took the same approach in advising the post-war Japanese government on how to re-build Japanese industry in a country devastated by defeat and nuclear bombs.


    The current Japanese Prime Minister, Shinzo Abe, is a follower of Shimomura.  His policies, reapplied today, have Japan growing, after years of stagnation, at 4% per annum and with minimal inflation.


    Our leaders, however, including luminaries of both right and left, some with experience of senior roles in managing our economy – and in case it is thought impolite to name them I leave it to you to guess who they are – prefer to remain in their fearful self-imposed shackles, ignoring not only the views of experts and the experience of braver leaders in other countries and earlier times, but – surprisingly enough – denying even our own home-grown New Zealand experience.


    Many of today’s generation will have forgotten or be unaware of the brave and successful initiative taken by our Prime Minister in the 1930s – the great Michael Joseph Savage.  He created new money with which he built thousands of state houses, thereby bringing an end to the Great Depression in New Zealand and providing decent houses for young families (my own included) who needed them.


    Who among our current leaders would disown that hugely valuable legacy?


    Bryan Gould

    2 October 2017



  1. mikesh says: October 4, 2017 at 9:56 pmReply

    “But, in any case, the master economist, John Maynard Keynes, had got there long before the closed minds and had carefully explained that new money could not be inflationary if it was applied to productive purposes so that new output matched the increased money supply. Nor was there any reason why the new money should not precede the increased output, provided that the increased output materialised in due course.”

    Inflation would still occur, I think, if the extra money caused competition for resources. In the 1930s, when John A lee launched his state housing initiative, there was little or no competition for resources as there were plenty of unemployed carpenters around. I’m not sure that this would be the case today. If the government wanted to try something similar in the present environment they would probably need to restrict commercial bank lending.

  2. Bryan Gould says: October 5, 2017 at 8:59 pmReply

    Good point – but a good problem to have, if the gain was as I describe. We might even get an uplift in wage rates!

  3. Tony Simpson says: October 7, 2017 at 4:05 amReply

    Bryan, I entirely agree except on one point. Although the state housing program of the Savage government was materially very effective it didn’t fully bring New Zealand out of the Depression. There were still over ten thousand people (and rising) on relief work in 1939, albeit on full wage rates for the job. What finally did the work was the Second World War which used Reserve Bank funding and internal loans to underwrite quite a lot of wartime expenditure. This was then recouped from taxation. Walter Nash who controlled this process has received less credit than he should for his masterly command of the New Zealand economy during that period. The volume by J V T Baker on War Economy in the Official War History series is very good on this. Unfortunately command economies cause resentment among voters because they entail significant controls and restrictions which extended post war so out Labour went in 1949

    • Tracy Livingston says: October 16, 2017 at 8:19 amReply

      Tony – if you are not feeling the effects of a depression, is there a depression? If NZ was creating its own money supply so men/fathers had jobs and families had warm, dry, safe houses to live in and food to eat, hospitals and healthy care etc, is that a depression? And if the govt is making its own money, why does the money have to be recouped via taxes, if not just to take people’s money away from them? not sure if I would agree that Walter Nash did a great job, what he did was give NZ back to the private banking sector after Micheal Joseph Savage died after only one term as PM. I always wondered about the “great” depression (even before I became a social creditor) – if you live in a wealthy country with loads of resources, why should people starve or not have a home to live in or have access to clean water. It seems to me that many New Zealanders were doing it hard, not because NZ was a poor country but due to inappropriate distribution of resources – we didn’t have a social equity system, the idea of which is probably the most important thing that MJS achieved in his short time in power.

  4. Bryan Gould says: October 8, 2017 at 3:37 amReply

    Thanks Tony – a very useful addition to my argument. You explain that the readiness to “print money” for public purposes seems to have been extended (as in the case of Roosevelt’s America) to the preparations for war.

  5. Zela Charlton says: October 12, 2017 at 8:51 pmReply

    I was born in the year of the Wall Street Crash of 1929 and have had many years to personally experience the effect on society ,and my own life, of the doings of the Financial World. I am an artist /educator by profession and do find both mathematical and economic theories almost incomprehensible. But commonsense seems to tell me that ‘the Emperor has no clothes’. Money is an artifact and so can be made. Hence ‘printing money’ .
    On a practical level, this means that it is better to put any saved money into something tangible like land or property. I have some small savings in 3banks ( for when they may collapse !) but no confidence it will still be there tomorrow, while my lifestyle block will – unless hit by flood, fire or storm, of course.
    Sorry for rant, but I did want to say how much I appreciate your words of wisdom.. and wish you were taking part in NZ politics actively. Though that would not be good for your personal sanity.
    Thanks !

    • Bryan Gould says: October 12, 2017 at 9:15 pmReply

      Many thanks Zela. My sanity is just about intact!

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