COMMENT:

Today should be a national holiday. We should be having a parade or at least letting off some fireworks. For this day, March 4, in 1985 was the day the dollar was floated.

I remember it well. Nothing happened. I remember my amazement that nothing happened. I was in the press gallery at Parliament and I remember the amazement of National MPs, then in Opposition, that nothing was happening.

The dollar was floating, not sinking, just bobbing up and down on the deals being done in currency trading rooms here and around the world.

Advertisement

We should celebrate that day because a floating currency is the secret source of a nation's genuine sovereignty. It is just as important as war of independence or a constitutional declaration, the events nations do celebrate.

Greece, for example, thinks it's a proudly independent nation but it has the polar opposite of a floating currency, the euro is backed by stronger economies and even a fiercely independent left-wing government could not carry out its desired economic and social policies against the will of the European Central Bank.

Between us and Greece there are many countries where governments fix their foreign exchange rates to varying degrees, mainly to the US dollar. That's how the Asian currency crisis happened. A fixed exchange rate is a rigid connection that transmits adverse events from one economy to the other. A floating currency is a shock absorber and a measure of our international credit.

That's worth celebrating because our credit is the judgment of others on the decisions we make. Most of us didn't understand that in the first week of March, 1985.

I remember Parliament's question time that week. Every afternoon National's finance spokesman, Bill Birch, would rise to tackle Roger Douglas about a fractional drop in the dollar that day. And every day Douglas could show it had rebounded. I think most MPs on both sides shared Birch's anxiety.

Economics 101 said the dollar should fall. New Zealand had a chronic deficit in external accounts. International prices for our farm products were not keeping pace with the price of the imports we wanted.

I first heard of a floating currency in 1971 from a lively, frizzy-haired economics lecturer at Canterbury University, Ewen McCann, who drew neat graphs on his blackboard to show us how, left alone, an exchange rate could automatically keep imports and exports in balance, doing all the work governments were then trying to do with import licensing, export incentives, exchange controls and periodically a devaluation.

He was excited by the idea but the implications sounded dire unless we could somehow produce more valuable exports. In any case, in 1971 a floating currency sounded like something we would never see.

Advertisement

But 13 years later, after oil shocks, wage inflation, unemployment, think-big schemes and a dead-end wage and price freeze, the economy was undergoing a radical change of management.

The float was telegraphed months before it happened. It was the logical conclusion of everything Douglas had done since July, 1984, when Labour had come to power amid a run on the currency and had immediately devalued the dollar by a massive 20 per cent.

In December he had removed foreign exchange restrictions, allowing New Zealanders to invest abroad and New Zealand companies to expand beyond our borders. From that point capital markets and they saw the float coming. Nevertheless, when the day arrived, it felt like a leap into the unknown.

Eventually, to our relief, Economics 101 turned out not to be the whole story. Currency markets did not simply respond to trade balances. Payments for exports and imports accounted for very little of the trillions of transactions on foreign exchange markets every day. Our living standards were not resting entirely on butter, wool and red meat after all.

They were in fact resting on something else — something we have never much discussed.
Senior public servants know what it is. Leading politicians in both major parties know. It's called "good government", which means balanced budgets, low public debt, keeping control of public spending and staying out of investment decisions that are better made by private enterprise in competitive markets.

Without fail, we have been electing good government since 1984. Even on the few occasions that MMP has let Winston Peters into government he has not dared do much damage to the economic policies he campaigns against. The fact that a seductive unprincipled politician has seldom attracted a vote of more than single figures speaks volumes for the New Zealand electorate.

But we should not take this for granted. Two years ago the UK and the US discovered how vulnerable good government can be when its benefits are not widely acknowledged. The float may be too prosaic for a parade but thank goodness for it, thank ourselves.