Recently a member suggested I write shorter blogs. Well I will in future but for now, this is the best place to put a ten page article I have been writing over the last few months. We invite comment at the end of this blog – and further questions. It is very much a work in progress and every time someone reads it they seem to come up with another angle, another nuance, another worry.. In another form it is the powerpoint I posted yesterday, so see the previous blog for a short introduction.

A Dual Currency for New Zealand (draft for further discussion August 7, 2012)

Proposal for a new land-backed currency – the Zeal

Why am I proposing a second currency for New Zealand?
I dream of a country which can protect itself from the horrors of financial contagion and where pensioners won’t have to protest in the streets against austerity measures.

I dream of a world where young couples can choose to have children without both of them having to earn money. I want a world where they can work towards their own home and don’t both need to work for pay.

I want a country where there enough good jobs available and the cost of living relative to their wages is low enough so that nobody will want to go to Australia and work in the mines or in the cities. All parents should be able to buy shoes for their children and put good food in their mouths.

I dream of a society where everyone lives in a warm, dry, healthy house and has enough good food to consume and enough clothes. I dream of a world where people who want to work can find it close to home and don’t need to choose between a long commute and expensive housing. I dream of a country where people can pay their power bills and afford to heat their homes. I dream of a country where nobody has to go to a loan shark to get their car fixed or to get a deposit for a rental flat.

I dream of a world where there is no need for protest against banks, or against the 1% who own most of the wealth. Could it be that one day we might respect our banks and our bankers?

I dream of a world where entrepreneurs, supported by good bankers and good mentors, can put their ideas and their new businesses into practice without the ridiculous burden of GST, income tax and company tax.

I dream of a world where nobody will again mention “the property ladder” or uses the phrase “getting ahead” Nobody should be bragging about making money from selling their home but they can brag about how hard they worked to improve it.

I dream of a world where the taxes are simple to administer and where the tax revenue is adequate to fund the work of government.  I dream of a world without GST and where nobody talks about the need to raise income taxes or GST.

I dream of a world where crime is a seldom uttered five letter word and where crime stories don’t lead the evening television news.

I dream of a world where everyone can afford to go to the dentist and not have to choose between living in constant pain or having teeth pulled.

I dream of a world where we use our housing stock wisely and there is an abundant supply of local building material and labour and enough local money to pay them with. I dream of a world where factories can spring up to manufacture durable and useful new products.

I dream of a world where artists, musicians, architects, and writers can make a good living and where we are surrounded by beauty wherever we look. We will have enough money to commission great works of art for our public places. I dream of a world where we have a huge stock of cheaply built ecohouses which look beautiful but are actually very functional.

So how are we going to get there?
This proposal brings together the writings of three visionaries. They all did their thinking and writing during a depression. In the 1870s depression Henry George advocated that land taxes replace income tax as a route to justice and prosperity. In the 1880s depression Silvio Gesell advocated a currency with a negative interest rate so that holders of money wouldn’t have an advantage over holders of goods and so that money would circulate, doing good. Finally there was John Maynard Keynes who advocated Government spending money into existence to stimulate the economy.

This proposal rolls the three solutions into one. It is influenced by the writings of Bernard Lietaer who advocates multiple currencies for stability and resilience. Lietaer believes single national currencies cause a great deal trouble. They are monocultures which are too vulnerable. It is particularly influenced by the ideas of UK thinker Adrian Wrigley, whose thoughts were stimulated by Margaret Thatcher’s Poll Tax. Adrian then put together land value taxes with reform of fractional reserve banking. I have used his model as a base and applied the other thinking to it.

As we roll on from Margaret Thatcher’s time to a time of accelerating climate change and global financial contagion, the imperative for delinking from the global economy is increasing.  This idea will prepare us for global financial collapse.

This proposal might then appear quite complex. But as I see it there is no other way but to combine these factors for a more egalitarian society in which everyone has enough of the essential housing, food, work and culture. I ask for your patience in understanding the reasons why these are combined in one big policy. If we do it piecemeal it won’t work. We can’t just reform the currency without causing property bubbles and inflation. We can’t introduce an effective land tax without shocking the economy and causing massive political backlash. We can’t spend money into existence by issuing more of a monopoly currency without putting a price on the holding of land to prevent inflation. So we might as well get it right when we have this opportunity.

What is this proposal?
I am suggesting having a currency just for New Zealanders. It is spent into existence not lent into existence. Unlike the currency we use now it is spent into existence without interest. It is designed to circulate not to save. It is spent to pay for land. Basically Government pays for someone’s land and in exchange they pay an ongoing rental to government for that land. So the currency comes into existence to pay for land, it is circulated within New Zealand at speed on products sourced at home and on the labour of New Zealanders. After circulation it is used to pay the rental on the land to Government. It is brought into existence by Government and is extinguished when it is received for taxes.

I believe this idea will allow us to get rid of GST, introduce a Citizen’s Dividend, reduce income tax dramatically and eventually completely and eliminate company tax.  If introduced it would simplify the tax system, ensure nobody made a profit from owning land and ensure that there was no inflation from the rising price of land.  House prices would drop.

Unlike other political proposals, this scheme is voluntary. As it gains popularity, fewer and fewer will have to pay interest on the money they borrow to buy land, reducing costs to homeowners. As the new parallel currency circulates, more and more jobs will be brought home.  Full employment will again be possible.  As it comes into use, low carbon industries will start to thrive and we will once again make our own clothes.

The Mechanism
Mortgage holders go to Treasury (not Reserve Bank) and ask for mortgage relief for the land value of their property. The Treasury spends dated Treasury Notes into existence and gives it to the homeowners who take it to their banks. We could call this currency the Zeal, so we have a second legal currency in the country. But this currency is designed to decay like goods decay. It is designed for spending. (Paradoxically this works to increase long-term investments in productive enterprise, see Lietaer and Belgin for historical examples New Money for a New Society) The Zeal is acceptable only for goods and services in NZ.

Treasury Notes or Zeals will only be tradeable in New Zealand. They will not be tradeable on the international currency market.

I am not sure of the mechanics of how Treasury, the mint and Kiwibank would work together, but the result could be a LOADED card with two chips, each with a currency loaded – one NZ dollars, one Zeals. And a certain quantity of notes but probably not coins. It would be critical to keep the value of the Zeal on a par with the NZ dollar and this could perhaps be done by a regular transfer of a small amount  (e.g. 2% every 3 months) from the NZ dollar chip to the Zeal chip. The face value of the new currency must remain constant, while a small hoarding tax payable in NZ dollars or cents is paid regularly to validate it.

The Zeals are dated, acceptable for tax maybe two years away e.g. July 2014, July 2015 etc. You can’t issue too many at once, just a proportion of the projected tax take for that year. Hence there is inflation control. Because they are dated, they decay.

The contract with Treasury would state that the mortgage holders would, within ten days, covenant their title, burdening it with the obligation to pay a 5% land tax to government in perpetuity. This would cover all rates and back rates. It is an opt-in scheme so there should be minimal political contention. We are proposing to just use current contract law. The land tax is paid in either Zeals or NZ dollars, as both are legal tender. The Government would set the ratio of Zeals to New Zealand dollars year-by-year.

Because tax is already paid as a land tax, no income tax, company tax or GST will be imposed on transactions using the second currency.

Land Rental Index
The land tax would be linked to a Land Rental Index, constructed by taking a sample of land rental values from the area, averaging it to give it a value of 100. Then the next year, it would go up or down a fraction, but generally it would be very little. Land rental values are very stable. Big movements would occur only if a region was serviced by new infrastructure (e.g. inner city rail network in Auckland). They would also rise if a significant new business appears e.g. when a fast ferry came to Waiheke Island. They will fall if some infrastructure disappears (e.g. if Gisborne railway is cut off by slips). They will fall significantly when earthquake affected land had reduced rental value or rise when the land was remediated. This would be fair to Christchurch property owners. If land falls down a cliff due to subsidence, the rental value drops to zero.

People buying their first home could also go to Government for the new money. If the value of the land was $300,000 they would ask for Z300,000. They would take it to the vendor, who would receive it and use it to buy another home. If the vendor didn’t want to spend it on a home they could then spend it in the economy. This is a method through which new money enters the economy.

First, the Government must give a proportion of the land tax to local authorities. Then, when it has amassed a certain amount of Zeals Government distributes a Citizens Dividend (it might be as low as Z50 or less) to every citizen over a certain age. The 1951 precedent in NZ was that when there was a high wool cheque the government gave out a five pounds dividend to all families. As more and more people opted in, this Citizen’s Dividend would gradually rise. This is a universal payment and is not asset or income tested. It will eventually lead to a full liveable income, the Universal Basic Income.

Those who have already paid off their mortgages can equally have their land paid for in the second currency. Some of them will be struggling to find suitable investments. They will figure that it is worth paying the land tax. Then when they have a substantial sum of the second currency in their hands, they can upgrade their homes or invest in a suitable business for the long term, and tax-free. This is real savings.  High income earners in their forties or fifties often fall into this category.

Results

·      Gradual transfer to land tax from income tax, GST and company tax

·      Covenanted house prices drop dramatically but no loss in equity.

·      Covenanted houses become affordable for the young earners.

·      More purchasing power in the economy.

·      Lower private debt.

·      Stimulation of NZ economy but only for low carbon economy i.e. businesses using imported goods will not benefit.

·      Land is gradually taken out from the market economy and returned to the commons.

·      As soon as the first Citizens Dividend is paid out, there starts to be growing political support, with social pressure for other mortgage holders to do it, too. Starve the banks and pay the government instead.

·      Rates relief. Only one payment on your land, the land tax or land rental.

·      A vast improvement in our Balance of Payments. because less importing will be needed.

·      Job creation starts as people started investing their Zeal in productive enterprises and firms save precious NZ dollars for imports.

Political: Australian owned banks which dominate the NZ scene will say they can’t do anything with the Treasury Notes. They can’t give them to their shareholders.
Answer: It is legal tender in our country so banks will be obliged to accept them. In fact, because the zeals decay the banks will most likely lend them out and end up behaving like a savings and loans bank does, which is good.
Banks retaliation: High exit fees for mortgage holders.
Answer: Legislate against that.

Effect on Māori of this proposal
The concept of nobody owning land is not new to Māori. Before the arrival of white settlers, Māori owned land in common and the only concept they had was of ‘guardianship’. They really had no concept of land ‘ownership’.

After colonists insisted that the land not confiscated or bought for a song be privatised and broken up, various Māori land laws were introduced, until we have the following situation:

The term “Māori land” refers to the following types of land that are owned by Māori:
1.  Māori customary land – land that has always been owned by Māori and has never been assigned individual title. Māori customary land cannot be bought or sold. This land would not be affected.

2.  Māori freehold land – defined by Te Ture Whenua Māori Act 1993 as “Land, the beneficial ownership of which has been determined by the Māori Land Court by freehold order”. Māori freehold land has strict provisions governing decisions about being bought, sold, and used. So when it comes to selling it is not a free market. Therefore the valuations cannot be done in the traditional way.

3. General land owned by Māori – other land owned by Māori may be multiply owned but held in General Title. Typically, this is Māori freehold land that was converted to general land by the Māori Affairs Amendment Act 1967. Because it is general land, it is not affected by the special provisions that govern the sale or “alienation” of Māori land in Te Ture Whenua Māori Act 1993. It may be multiply owned.

4. Māori Reserves – land that has been officially set apart for purposes that include village sites, marae, meeting places, recreation grounds, sports grounds, places of historical significance, or places of special significance according to tikanga Māori. This land would not be affected by the proposal.

So only Māori freehold land and general land owned by Māori could be affected by this proposal. Given the reality of multiple ownership, and the fact that with each generation there are more and more owners for every land title, it is more and more difficult for all owners to agree. Some have moved to Australia or live elsewhere in New Zealand. Some owners are simply not found. And until Kiwibank introduced a scheme in 2011, banks haven’t lent on Māori land. Consequently much of the land under the jurisdiction of the Māori Land Court is undeveloped and underutilised.

The valuation situation is also different. In the case of Māori freehold land, if the land was sold, it has to be to someone in the same iwi so there would not be the situation of a willing buyer and a willing seller. Therefore valuation becomes an area of contention and injustice as Māori land has been valued too high. As a consequence, when it comes to paying rates to local councils, there is often a long history of disputed back rates.

However, a question to be answered is, in rural areas especially, much land is already Māori-‘owned’ (in a Western sense): so how might land-‘owning’ Māori ‘opt into’ such a scheme? While many Māori may be ‘land rich’, they are often ‘poor’ in their ability to utilise it. A descendant of a deceased Māori landowner must apply to the Māori Land Court to establish their right to shares in the land. On average there are now 86 owners for every land title. When it comes to building on Māori land, the owners not only must organise and agree, but there is a plethora of agencies to be consulted. Only recently after the introduction of a Kiwibank scheme, has there been the opportunity to borrow for building on Māori land. It is no surprise that given the other challenges, very few have taken up this offer.

About a third of titles have been organised by Māori trusts and incorporations. These entities rent out land, and when they are beneficiaries of the rising price of land their rentals rise. They publish annual statements that document the rising value of their assets. For example in 2011 the Wakatu Land Trust in Nelson had an asset base of $238 million, up from $11 million when they were formed in 1977. 70% of their assets are in land and 30% in food and beverage. They lease land and also have subdivisions and commercial properties. There are 11 million shares among 3000 descendants, together with educational scholarships, youth programmes, marae grants etc.

The Māori Trustee which administers 105,000 ha of Māori freehold land in the North Island collects some $18 million in rent each year. As with other leasehold land, when the lease expires and there is a rent review, the rising value of land often results in a dramatic rise in rental income.

The Tainui Group Holdings declares on its website that its “core business is property investment and development” and has $694m in assets. Nonetheless, after generations of being alienated from land, and remembering they spend their money on youth, education etc, you can understand it.

Large-scale farming is also carried out by a number of big Māori incorporations. Parininihi Ki Waitōtara Incorporation, based in Taranaki, has 13 dairy farms and milks 8,000 cows on 2,500 hectares of productive farmland. In 2008 the incorporation had a $50 million farming interest in Taranaki, and collected rents from 20,000 hectares of perpetual lease. Others are in forestry, sheep and beef and horticulture. Tainui owns a hotel.

So while the proposal is in line with Māori values on ownership of land, things have moved on since pre-colonist times. Māori land is not always served well by sewage, water and other services of local authorities and there are many obstacles to overcome before they build. So while the proposal is in line with Māori values, it could not be seen to be a magic bullet for building houses on Māori land. However in its current form will not be acceptable to Māori and a great deal of discussion is required.

Objection 1: It would just be a second-rate currency. A lot of islands in the Pacific use the Australian or NZ dollar. Their own currency is not used very much.
Answer: But the banks still get the best security. For centuries banks have been allowed to create money as mortgages and charge interest. Banks at the moment draw their income on the best security – land – leaving governments to depend on the less secure income tax. Pacific Island currencies are not based on land, nor are they designed to decay. So there is no comparison possible between the two. Since the
Zeal must be validated every three months by a 2% payment in national dollars, the second currency has a value exactly the same as the first currency. It is artificially constrained from dropping in value. No one can prefer NZ dollars to Zeals. Zeals are legal currency because they are acceptable for taxes.

Objection 2: You wouldn’t get people to use it
Answer: It would be up to the Government to accept the currency for taxes, rates, ACC fees etc, and to enrol major NZ companies in the idea of accepting it. Telecom, State Insurance, Fonterra, State-owned power companies if there are any left etc. If people could buy their butter, milk, insurance, phone services and electricity in Zeals and pay rates and taxes in it, that gives it huge value. There is no comparable situation in island countries.

Objection 3: If NZ-owned banks were cooperating with Treasury to put this currency into circulation, the Australian-owned banks would declare war on them and not accept their credit.
Answer: Yes this could be difficult. There are four New Zealand owned banks – Kiwibank, the Cooperative Bank, TSB and SBS and they are all in the circuit of banks which settle with each other each night.  However remember that the big NZ-owned companies could well be on the side of the New Zealand owned banks and public support for the scheme might grow, so the contest might end up being even.

Objection 4: It is better to use the Reserve Bank credit.  It is simpler
Answer: The Reserve Bank is tied up internationally with the big international banking system and the possibility of it changing is remote. The Governor goes to Wall St regularly. Moreover, once the Governor is appointed by the Minister of Finance, there the public control of the Reserve Bank stops. So instead we start with Treasury, a government department answerable to the Minister of Finance. Treasury Notes have been issued before in various countries at various times.

Besides you are replacing a monopoly currency with another monopoly currency.  The reason for doing this is to have a range of currencies for resilience in times of economic recession/depression. Using Reserve Bank credit without land tax is not addressing property bubbles and inflation.

Objection 5: You should do it without the complications of decaying money. If your money decays, this is like inflation and it harms the poor.
Answer: Demurrage or a tax on hoarding is different as it penalises only those who hold money for too long. Inflation harms everyone, especially the poor. A circulation incentive ensures it changes hands regularly and when this happens, much more good is done. A similar currency in Wōrgl, Austria during the depression circulated fourteen times as fast as the Austrian schilling. Holders of money should not have an advantage over holders of goods. A decaying currency actually helps the poor because they spend almost all their money anyway on basics and this system helps with the provision of basic housing, food, electricity and clothing. They will spend it quickly anyway, so it won’t make any difference to them. But will make a big difference to those who hoard a lot of money.

Objection 6: People would fill up their houses with junk. If money had to be spent and there was plenty of it, then people would go out and buy cheap Asian goods.
Answer: Well this is a currency for the use of New Zealanders buying New Zealand products. So it couldn’t buy cheap Chinese goods. The new currency wouldn’t be able to buy imported oil based products, petrol, plastic, etc. We could save our precious New Zealand dollars for buying our necessary oil, machinery and pharmaceuticals. It is possible that home storerooms would be larger. But generally people will pay their taxes earlier, lend more readily to family members and friends, and pay their rates earlier.

Objection 7: There would be inflation
Answer: The money supply wouldn’t change if people were just relieving their mortgages and taking Zeals to their bank to cancel the previous money. Moreover, since land is gradually taken out of the market economy there will be a reducing tendency to property bubbles and eventually this would decline to zero. Every property bubble causes inflation. This inflation is now not taken into account for the Consumer Price Index so inflation is hidden in the official figures. It seems to good too be true but without rising land prices, with controlled issuance of money and without interest on money there would actually be no inflation.

Objection 8: The banks wouldn’t lend out this new money.
Answer: They would have to be stupid not to, because if they hold on to it, it decays. The zeals rot like potatoes and rust like iron. So the banks would lend them out all right – probably the whole lot of it. It has to be got rid of. They wouldn’t use it to back a new loan in NZ dollars with interest; that doesn’t help them get rid of the decaying currency. When we design money to turn it on its head, behaviour towards the money is turned on its head, too.

Objection 9: The loan the banks made in the first place was fraudulent because they created the money to lend and then charged interest on it. Why honour a fraud?
Answer: The alternative is worse. South Africa has a case coming up in court to challenge the banks but it is extremely costly and may fail. The financial ability to hire top lawyers is a barrier, so this is a very unequal option. We don’t want to be politically naïve here. We pick our political battles carefully.

Objection 10: You would need to amend legislation.
Answer: Yes, there could be several Acts to amend.

Objection 11: You wouldn’t get farmers opting in, nor would the asset rich, income poor. Nor would overseas owners.
Answer: Well some young farmers might opt in, the ones with a huge mortgage. And the asset rich, income poor wouldn’t opt in at all. They don’t need to. The overseas owners might have to be dealt with eventually by legislation. But generally when people observed all the good that the land covenanting process was doing creating jobs and bringing old jobs home, more and more homeowners would opt in. There would be a snowballing effect.

Objection 12 Land tax isn’t fair for people with conservation areas on their property or whose homes are designated historic.
Answer: You are quite right. Land already serving a public purpose will be exempted.

Objection 13 If you have dated currency it would disappear when it was paid for taxes on that date. The money supply would shrink.
Answer: Yes it does, but government is always creating new Treasury Notes for the subsequent years. It will take quite a while for Government to buy up all the land in the country and then maybe the system could be modified.

Objection 14. If you have abundant currency and an imperative to spend it, every river in the country would be dammed.
Answer: 70% of our electricity is already from renewable resources and we shouldn’t need more rivers dammed. Comalco uses a huge proportion and the new currency will not favour them. Rivers should be vested in the Crown as nobody can own a river. Nonetheless, an appropriate rental should be put on the commercial use of water. Water for electricity should be subjected to the equivalent of a 5% land tax for privately owned electricity companies. If we charge a decent sized rental where the company is privately owned, but not for one which is Government owned, that would make privately owned electricity companies uneconomic and they may choose to sell back to Government. Then as a country we can collectively decide if we want more electricity. The campaign against damming the Mokihinui succeeded. Public opposition could prevent further unacceptable proposals. The land covenanting process won’t take away our collective responsibility to care for the land and the environment.

The pressure for more river damming is dependent on the standard of living, on population and also on the energy use per capita. When the new currency has effect, there will be a huge boom in home insulation, thus reducing the demand. When there is more egalitarianism due to the Citizens Dividend and the move to land tax and public money, the status of women will rise and with it a reduction of the birthrate (the solution to global population overshoot is similarly about improving living standards through public money, reducing poverty birthrates).  When there is a dual currency imports will fall and we won’t be able to have television sets in every bedroom, a huge trucking industry and throw away computers.

Objection 15. A currency designed this way will stimulate every section of the economy, including local coal, oil, gas, unsustainably harvested timber, and products and service using these, and products from unsustainable farming and fishing.
Answer: Every one of these resources should be taxed properly. If you have a high enough level of resource rental for coal, oil, gas and native forest and the land surrounding it etc, then this will be a good disincentive for would-be developers. Moreover, the collective responsibility to care for the environment still exists. The currency doesn’t absolve the community from its kaitiaki whenua obligations.

Objection 16. If a purchaser was choosing between two properties with comparable land value and the same improvements value and one was covenanted and one wasn’t they would bid higher for the covenanted property. Covenanted improvements would cost more to buy than non-covenanted improvements.
Answer. The value of the covenanted property is actually only half the value of the other comparable property because its title is now heavily burdened. The selling price ends up being the equivalent to the bricks and mortar plus any improvements added, plus the extra resulting from the added competition from buyers. (There would probably be more buyers in that price range, putting up the demand). Nobody would pay more simply because their annual outgoings on the covenanted house would be less than the other. They would be more likely to save that money for their own improvements, knowing they will get it back when they sell. Nobody’s improvements should be taxed, they should be encouraged.

Objection 17. Mortgages at least come to an end. These land taxes don’t. So I would be better off with a mortgage. At least I can pay that off.
Answer: Remember that over twenty years you also will pay a great deal of income tax and GST. Add that up and you will find it comes to a great deal more than you are paying in land rental. Once you get the fact that land taxes are a replacement for other taxes not an additional tax, you realise you will be far better off. Prices fall without interest on money, prices fall without GST, prices fall when income tax disappears. Everything becomes in fact much more affordable.

Conclusion
This proposal outlines a viable option for what has been called sustainable development in New Zealand. Development isn’t static. It is the shrinking of some sectors and the growing of others, or qualitative and not simply quantitative. Up to now talk of sustainable development has been all rhetoric. The term ‘steady state economy’ actually is a dynamic state. Another phrase that has become popular is “green growth”. But very little progress has been made. Progress can only be made by designing our currencies differently and by changing our tax and welfare system. This proposal does both and does it in a way that doesn’t shock the economy. When there is currency reform and land ownership reform of this magnitude, there will be a surge of optimism that bears a great deal of fruit. A new era of house building, home insulation, food growing, food processing, manufacturing and a whole new attitude to money will have arrived.

Deirdre Kent