On Saturday one of the local churches was holding a garage sale. My 9 year old likes such sales, searching out additions to her collection of small treasures. But this sale also had several boxes of books they were giving away – titles sufficiently obscure that no one, it was thought, would even pay a dollar or two for them. My family stocked up on books, and among our pile was a period piece, a report by the New Zealand Planning Council “New Zealand After Nuclear War”.
This report was published in 1987, funded from $125000 allocated by the then government from “reparations paid as a consequence of the sinking of the Rainbow Warrior in Auckland Harbour”. It even, so I just discovered, got a mention in the New York Times.
The scenario the authors used was a pretty serious one – a major nuclear war in the Northern Hemisphere, and a limited number of nuclear strikes, mostly on defence and communications related facilities, in Australia. New Zealand isn’t directly involved in this war, but we hardly escape unscathed. Apart from anything else, we were (and are) heavily dependent on foreign trade. One of the aspects of the scenario is an electromagnetic pulse which, apparently, could have undermined (“instantly cripple”) computers, phones, electricity networks etc.
I haven’t read the full report, but the chapter that caught my eye – in this age of stress tests – was “Initial Impacts on the Financial Sector”. The authors don’t seem to have consulted the Reserve Bank, but they did talk to Treasury, to at least one of the banks, and glancing through the list of acknowledgements I saw various names of people with banking or related backgrounds.
All the chapters are brief, but this was a serious attempt to think through the issues, albeit perhaps in way that assumed a degree of post-war resilience that doesn’t quite ring true.
I was initially staggered at the suggestion that banks might need to shut for only a couple of days, as much because staff might be unsettled as for any other reasons
But as I read on, the authors were very conscious of some of the other problems. The risk, for example, that electronic records could be destroyed, or barely usable.
And, in the longer-term even more importantly, the extreme uncertainty about asset values.
What, for example, would be a book full of dairy loans be worth in a world in which much of the population abroad had been wiped out? Or, since this was 1987, what might loans to Judge, Equiticorp, Chase and so on have been worth. Oh, but I forgot, not much anyway.
They see a considerable role for government support for the banking system.
And conclude, perhaps least plausibly, with the suggestion that pre-war planning might “moderate the adjustment process”
I don’t want to be particularly critical of this piece. If from this distance the prospect of nuclear war seems less real than perhaps it did in the 1980s, it is still worth thinking these sorts of issues through, and people do what they can in the time they have – in the case of this report, that was not overly much time. And I spent quite a lot of time over the years in planning for some, rather less severe, contingencies – Y2K, and as part of the wider government planning a decade or so ago around bird flu risks. I led a team inside the Reserve Bank working on policy and banking system preparedness for bird flu. As a result of that work two bankers’ reactions are seared in my brain: the senior manager at TSB, clearly unimpressed at having us visit, who turned around, and pointed out the window towards Mt Egmont and announced “we have more immediate risks we prepare for here”, and the head of risk at one of the major banks who told us very confidently, when we asked about rollover risks for offshore funding in the event of a global bird flu, that such markets could and would never seize up (this a mere two years before the crisis).
But there were still a few surprises about the report. Perhaps because it was written only a couple of years after liberalization, there is not a single mention of the exchange rate, or interest rates, in the entire chapter. These days, I’m sure people would put much greater attention on the panic and market chaos that would be likely to ensue as this (scenario) nuclear war was getting underway. The aftermath might be truly awful, even in New Zealand, but the transition would be really pretty bad too. The global financial panic in the first days of World War One was documented in a recent book, and bad as World War I turned out to be, no one had any sense of the scale of that disaster when extreme financial crisis nonetheless ensued. Since the aftermath of nuclear conflict might be almost unknowably awful, if authorities were ever to think of contingency planning for remote events of this sort, it might be more productive to focus their efforts on the period in which hope is fading, fear is soaring, but the institutions and infrastructure have not yet been destroyed.
Credit pre-dates money, and relies on trust. But in what could anyone trust in the sort of world the authors of this Planning Council report try to grapple with?