Money: past and future

On Monday 10 July 1967 New Zealand adopted decimal currency. Presumably the government chose a Monday because in those days shops in only a few areas were open on Saturdays and almost all shops and other businesses were closed on Sundays.  Nothing else very significant seems to have happened in the world that day, and no one very famous was born on it.    We adopted decimal currency a year after Australia did and four years before the United Kingdom did.

But of course the dollar isn’t what it used to be.   Here is a chart of the purchasing power of $100, based in June quarter of 1967.   By 1975, purchasing power had halved (prices doubled), by 1980 it had halved again, and even since the current Reserve Bank Act was passed in December 1989, mandating the Reserve Bank to achieve and maintain a stable general level of prices, consumer prices have increased by 76 per cent.   $100 today purchases what $5.60 purchased in 1967.

purchasing power

So much for price stability.   As I was typing this I noticed that the Reserve Bank had put out a press release to mark the 50th anniversary.  The Governor notes

“This milestone is a great opportunity to reflect on a point in time and see how our banking has evolved and how our money has changed over the years.

Perhaps also an opportunity to reflect on the declining value of that money?

Of course, shifting to decimal currency itself didn’t materially alter the average inflation rate.  What did that was the establishment of the Reserve Bank itself in 1934 (at which point private issuance of banknotes was also outlawed).

purchasing power 2

Prior to the creation of the Reserve Bank, the price level tended to be quite stable over long periods of time (but rather less so in the short-term).

There are good reasons for having a Reserve Bank (although the case is less overridingly compelling than the advocates sometimes claim), but it is worth being aware of what was lost when central banks and fiat money replaced earlier systems.   We lost, for example, any sense that money today will be worth roughly what it was in your grandparents’ time and what it will be in your grandchildrens’ time.  Does it matter?   On the one hand, we don’t mess around with, say, weights and measures that way.  A metre is what it was generations ago, and what it will be generations hence.   Weights and measures are social conventions too.    A reasonable counter is that very few people, other than governments, enter into long-term nominal contracts, but that might be partly because the future price level is so uncertain, while the future length of a metre isn’t.   In practice, there seem to be wider economic advantages in some circumstances is being able to generate unexpected changes in the price level (and alter the exchange rate), but whether they are worth the costs –  including the mismanagement by governments and central banks at other times –  is worth reflecting on from time to time.

When governments monopolised note issue (through the Reserve Bank) we also lost the opportunities for competitive innovation in hand-to-hand payments media, and left ourselves reliant on monopoly government suppliers.  Those sorts of suppliers usually don’t do a particularly good job in providing high quality goods and services in other areas of commerce, and it isn’t clear why we should expect much different in banking.  The state doesn’t monopolise the issuance of electronic payments media, and look at the innovation we’ve seen there.

Regrettable (and unnecessary, even if you wanted a central bank) as the statutory prohibition of private banknotes is, one might have supposed it was becoming increasingly less relevant.   If it is true in some countries, it isn’t here.  Here is a chart of the value of bank notes held by the public as a per cent of GDP.

bank notes

If bank notes are now being used for a smaller proportion of (licit) transactions, perhaps they are still being heavily used as a store of value (as the opportunity cost of holding cash has fallen, as interest rates have fallen) and for illicit transactions?

I was interested to see the outgoing Governor comment today on future prospects for physical cash.

Despite the growth in electronic payment systems, cash in circulation continues to grow and I expect cash, as a means of exchange, to be around for a long time yet.

The problem is that not only is cash becoming more popular, but we are getting nearer the point where it could either (a) become a great deal more popular indeed (if the Reserve Bank wanted to cut interest rates very much below zero),, or (b) where that option could severely limit the ability of the Reserve Bank to use monetary policy effectively in a severe downturn.  That ability is the main reason for having a Reserve Bank, and discretionary monetary policy, in the first place.

I noticed that the Governor did qualify his observation about the future of cash, noting that he expected it to be around “as a means of exchange” for a long time yet.   Did he mean to suggest it might not be around for long as a store of value?     It is the sort of the issue the Reserve Bank needs to address more extensively and openly.

The 50th anniversary of decimal currency is a good opportunity for some fun, looking back at what the country was like at the time of the changeover.    But after a few hours of looking back, it is probably rather more important for our officials –  in the Treasury and the Reserve Bank –  to be thinking hard about the constraints their statutory monopoly is coming closer to placing on our ability to use monetary policy for what is is designed for.    I’ve long favoured removing the statutory prohibition on private banks issuing bank notes.   Perhaps doing so wouldn’t come to much, but we can’t know if we keep the prohibition in place.  Perhaps they’d develop technologies combining the convenience of hand to hand currency with the potential for a variable rate of return?

But perhaps more immediately pressing now is a clear programme of work to ensure that when the next serious downturn comes we can have both the advantages of our existing physical cash as a payments medium (and even as an anonymous store of value) and the flexibility that discretionary monetary policy is supposed to have given us.  At present, we are drifting towards the rocks –  the next serious recession, whenever it happens –  with no sign that the Reserve Bank (and other relevant agencies/ministers) are taking the risks at all seriously.    It is another issue for the Reserve Bank Board to have in mind in assessing the applicants for Governor.  After all, one dimension of leadership is looking a little further ahead than other people, and charting directions.


12 thoughts on “Money: past and future

  1. I wonder if any “gold bugs” will turn up here and advocate a return to a gold standard. Also no mention of cryptocurrencies such as bitcoin.


    • Yes, in many ways the Gold Standard served countries reasonably well while it lasted, at least pre WW1. And the problems in the US weren’t due to the Gold Std, but to the panoply of regulation that limited banks. Whenever I’ve toyed with free banking as an option for NZ, I realise that what would happen in practice is that we would become a de facto part of an RBA monetary area

      I haven’t been following cryptocurrencies as closely as I should. I’m probably more interested for now in the possibilities of giving the wider public access to electronic central bank money.


      • Those cryptocurrencies seems to be more used by drug cartels and money laundering activities then a genuine alternative. With value increases like 5000% per year it just does not come across as a reliable medium of exchange as supply is limited to trap large capital increases.


      • Michael, I’m pleased to learn that you too are keen for the public to be granted the right to have accounts at the RBNZ and make their payments in electronic central bank money. I would no longer need a bank account. Bring it on!

        Once that happens, we could have a banking meltdown and the payments system could still operate. As a result, government would no longer need to prop up failed banks, but could just let their creditors — including their depositors — stand any losses.

        Even better, IMHO, would be for the government to switch to a Sovereign Money banking and monetary system, thus removing from banks their power to create money ex nihilo. had that been done in 1967, we could have had zero inflation since then, if that had been government policy.


  2. Seems to make some sense to have only one currency issuer: would a ‘$10 note/object’ issued by BNZ, ANZ, Kiwibank etc. do much for confidence within the money holding sector? I guess they could trade at a premium or discount to an RBNZ note which could breed some excitement but not sure how those new self-service machines at the supermarket would cope….


    • $10 thru an ANZ debit card buys just as much as $10 thru a BNZ debit card….and as much as $10 in RBNZ notes. I don’t think you would find premia/discounts in paper notes that had the same credit quality as deposits we alll use now.

      We didn’t have a single currency issuer pre 1934, but it is an interesting (if potentially academic) question as to whether technologies (whether self-service checkouts or parking meter machines) change the economics. I suspect not – you;d get standardisation on common base technologies (as with debit/credit cards themselves).


      • There’s no problem with electronic money because people can’t see the electrons! However, with different banks having different polyolefin film (not paper) notes, people would be able to see the difference. Michael, you seem not to realise that the vast majority of the general public believe that the government, through the RBNZ, creates and issues every physical dollar, and every electronic dollar, in circulation. They have no idea that 98% (approx.) of the money in circulation is electronic and is created out of nothing by banks when they grant ‘loans’ and that money is destroyed by those same banks whenever any loan principal or part thereof is repaid.


      • In NZ, there a a range of other institutions issuing their own currency which you can buy drinks, liquor, lap dances and offer tips in exchange for kisses and hugs with. There is the Showgirls currency, Penthouse currency, Mermaid currency and Whitehouse currency. In fact Showgirls currency is interchangeable with Penthouse currency.

        But even though they are not policed by the Reserve Bank. There is a strict protocol in that it can only be exchanged against a NZD and no other international currency is recognized.

        It is a acceptable medium of exchange because the market and the vendor accepts it knowing that it is a controlled medium of exchange.


  3. …beg to differ; those cards enable identical purchases and shuffle demand deposits about the system on the assumption that the latter are ultimately redeemable at par in currency issued by the RBNZ; think I read somewhere that during the US free banking era, private bank notes often traded below par in areas further from the issuing bank and definitely below par on a panic (main reason for the Fed?); but agree, all fairly theoretical….


    • and people would have no reason to treat ANZ bank notes any differently than ANZ demand deposits. take your ANZ note into the ANZ branch, and they still be willing to pay you out in RB notes.

      In the so-called free banking period, there were differences, but here we already have revealed evidence of how the claims on the different banks trade – identically. No one worries, in accepting a debit card, whether it is a Wpac or an ANZ one. I’m not proposing free banking – just the ability to issue a specific additional form of liability.


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