On Saturday 2 March 1985 New Zealand passed a milestone in its history. We joined the world that day. The morning dawned fine. But as people prepared for a late summer weekend, many gathered around their televisions. David Lange was in full flight at the Oxford Union, debating the new Labour Government's anti-nuclear policy. A phrase that captured our imagination tripped off his tongue when a privileged young Englishman praised nuclear weapons. "I can smell the uranium on your breath", our Prime Minister shot back, to roars of applause.
Meanwhile, on the sixth floor of Wellington's Beehive at 10.30 that morning, Finance Minister Roger Douglas held what was arguably the most important press conference of his career. Having gained Lange's agreement, Douglas announced that New Zealand was adopting a more flexible exchange rate; we were "floating" our dollar. This ended Robert Muldoon's basket of currencies where the Reserve Bank kept pushing the exchange pegs against other currencies downhill. In effect we decided we wouldn't risk going down the Argentinian route to prosperity. Henceforth, exporters and importers would make their decisions according to the critical judgement of the world that was reflected in the value of our dollar, and how well we were seen to be doing economically.
Ministers held their breath. Now that we had removed all controls, would the dollar float like a brick? There had been a 20% devaluation the previous July because of a run on the currency during the snap election campaign, and there was an element of risk in Douglas's announcement. Much to everyone's relief, the dollar gradually gained strength. For a time it went too far as overseas investors chased New Zealand's high interest rates, negating the advantage that devaluation initially gave our exporters. But we opened ourselves to the world without major catastrophe. The only crowds in the street were those who surged around Lange when he arrived home a few days later after his tour de force on behalf of our nuclear-free policy.
Since March 1985 New Zealand's dollar has lived life on its own. This was a major departure. Until 1931 our currency had the same value as Britain's. Over the next two years it was devalued by 25%, then restored to parity in August 1948 when the British were forced by economic mismanagement to devalue. A measure of New Zealand's relative economic decline was that Muldoon devalued by more than Britain in 1967. Over the next eighteen years, as successive governments spent more than New Zealanders earned, our dollar became linked to America's, but kept sliding. Imports and travel got more expensive.
It was Lange's government that finally decided there was no point in trying to defy the laws of gravity. Henceforth we would make our way in the world without regulations and controls. After 1989 a Reserve Bank, freed from political controls except an instruction to curb inflation, was responsible for determining monetary policy.
Has it worked? Only a bold person would call it a miracle. But it certainly arrested our steady slide downhill from the mid 1950s when we enjoyed the fourth highest per capita income in the world. By 1984 we had slipped to 21st. There we have stayed resolutely on a ledge, neither falling further nor clambering back, although our perch looks precarious as several developing economies grow faster than ours. That 1985 change helped us adjust quickly to the Asian downturn of 1997 and is a factor in today's reasonably buoyant economy. Certainly we haven't had to face crises like those in Argentina where they de-controlled the domestic economy but kept their peso artificially pegged to the American dollar. When the Argentine economy slid in 1997, speculators began converting their over-valued pesos into American dollars. Banks ran out of them; the public rioted in the streets. These days New Zealanders are more likely to take to the streets to protest against GE food than to topple a government. That's because seventeen years ago, ours had enough common sense to join the real world. Had we not done so, then as sure as God made little apples we would be living life Buenos Aires-style, and sliding to 35th spot.
The biggest advantage in a floating currency is its transparency. The value of the dollar tells everyone in neon lights where our economic problems lie. In the 1980s and 90s Argentina's politicians preferred to maintain an illusion. They hid reality from people. Reluctantly, New Zealanders have learned to live in the modern world. Reality slowly returned to our economic life. If only David Lange had stuck to the things he did best, we'd have a living standard that was 20% better than it is. And still as proud of his contribution as we were that Oxford day.
Michael Bassett is an historian and author who sat in the Labour cabinet that floated the dollar.