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Home / Rotorua Daily Post

Bryan Gould: Creating new money for the good of the country

Bay of Plenty Times
6 Mar, 2018 12:00 AM4 mins to read

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In the 1930s in the middle of the Depression, Prime Minister Michael Joseph Savage authorised the creation of new money so that thousands of new state houses could be built. Photo/file

In the 1930s in the middle of the Depression, Prime Minister Michael Joseph Savage authorised the creation of new money so that thousands of new state houses could be built. Photo/file

Our new Government has made a confident start, and not least with one of its better ideas – a Provincial Growth Fund.

We now know enough about this proposal to recognise just how valuable it will be, not just to the regions but to the whole country.

That it will deliver a boost to those parts of the country whose economy has been languishing cannot be doubted.

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The focus on communications and transport alone, with the special emphasis on rail, will help to bring more distant areas of the country back into the mainstream. And better rail communications will not only keep trucks off our roads but will bring benefit to enterprises such as the Port of Tauranga.

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And it is not just output that will benefit. It will be local employment as well – and more jobs will provide a shot in the arm to local retailing, construction, and investment – a veritable virtuous circle.

And then there are the benefits to the environment that are clearly being targeted. Tree-planting on a large scale will boost forestry but will also help us to meet our greenhouse gas target. The shift in transport policy away from building more roads in favour of updating our rail network will do likewise, as well as reducing the road toll and opening up new development.

But those conditioned by years of being told that cutting government spending is the top priority will worry about the cost of these measures. Funding all these initiatives from one dedicated new fund is a good idea, but the money for the fund still has to come from somewhere, doesn't it?

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Well, not necessarily. You may be surprised to hear that the one thing that governments are never short of is money. Governments all around the world have been creating large quantities of new money for the past 10 years or more. We don't always recognise it as such because they have preferred to call it "quantitative easing", but creating new money is what it is.

Quantitative easing, however, almost always had the limited one of providing money to the commercial banks so that, after the Global Financial Crisis, they could re-build their balance sheets.

But new money created by governments does not need to be for that purpose alone – indeed, creating it to invest in the productive economy so as to produce an immediate return to the country as a whole makes a good deal more sense than just helping out the banks.

And that is what experience in earlier times and in other countries tells us. Many countries have in the past created new money to fund increases in output – whether it was President Roosevelt building American industrial capacity in preparation for entering the Second World War or Japan rebuilding its industry after its defeat in that same conflict (and Japan is doing so again today).

And Britain rearmed in a hurry to withstand a Nazi invasion without worrying where the money would come from.

What those countries realised was that it was ridiculous that the effort to increase output should be frustrated for the lack of money, when the government could create all the money that was needed.

Our own history offers us one of the most important instances of this being done. In the 1930s in the middle of the Great Depression, the great Labour Prime Minister Michael Joseph Savage authorised the creation of new money so that thousands of new state houses could be built, thereby providing jobs for the unemployed and homes for the homeless and – incidentally – an income-producing asset for the government.

Money is after all primarily a facilitator or enabler, it makes no sense for governments that are ready to create new money for financial purposes to baulk at doing it for productive purposes if the need is there.

The great economist, John Maynard Keynes was very clear.

If the banks can create new money every day for their own profit, why shouldn't governments do likewise for the purpose of investing in our productive capacity?

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Creating money by the government cannot be inflationary, said Keynes, if it is matched by increased output – and isn't that exactly what the fund is designed to do and will achieve?

Couldn't it be even more effective with some real oomph behind it?

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