This paper develops the case for a currency issued by a local authority and proposes a contract where a land levy is paid to council in exchange for local dollars to assist would-be purchasers to buy land. It addresses both land and money together. It argues for a currency that has a built-in incentive to circulate fast. It will supplement the existing interest-bearing monoculture of a national currency. It introduces a local Citizen’s Dividend. Local currencies need to shift up a gear. It describes the probable effects of such a marked change in the scale of complementary currencies, where they are issued in millions rather than hundreds of dollars. It argues that such a currency will stabilise the price of property, cause new prosperity, move business towards sustainability, stimulate new industry, create new jobs and move to a low carbon economy. The knock-on effects on the central government are discussed. It argues for a smooth gradual introduction of this dual currency system linked to land. Involvement of Maori is essential from the beginning.
1. That, because land is not an ordinary commodity and everyone has a right to land, no one should profit from owning land.
2. That local government should have more power relative to central government.
3. That the health of the local economy and the health of the national economy are equally important. A win for one is a win for the other; a loss for one is a loss for the other.
3. That local government and central government should therefore be in constant negotiation with each other. They are friends not enemies.
4. That inflation and deflation are undesirable and must be strenuously avoided.
5. That homes should be more affordable and there should be a higher rate of home ownership.
6. That wealth should be more evenly distributed among the citizens.
7. That taxing earnings, enterprise and spending is counterproductive.
8. Farmers should be farming for food growing and not for capital gains.
9. In the face of financial and environmental crises and resource limits we need to have a scaled-up local currency so this is a golden opportunity to design a currency with a circulation incentive.
10. Dual currencies supplemented by many smaller local currencies like timebanks and LETS bring stability, resilience and prosperity.
11.Those who hold the land in trust and make it more productive or improve the buildings on it should be rewarded by the system, never penalised.
12. With the global financial situation unwinding fast we are facing a future of a diminishing money supply yet a declining purchasing power, in other words a long depression.
13. We are living in a cauldron of threat yet in an exciting time of creativity.
14. A Sharia compliant currency would alleviate some serious political issues.
Currently 98% of the money supply of a country has been issued by private banks at interest. Most of this money is issued as mortgages; so overseas-owned banks currently have a claim on a large proportion of New Zealand’s homes and farms. And it also means money is deeply implicated in the conversion of the commons to private property. Banks benefit from the rise in land prices because they are always lending more and more and property is the security for their mortgages. The monopoly money system brings instability, partly because of growing debt. Banks are owed $173 billion worth of mortgages in NZ. We need to stabilise the price of land.
When the price of land increases over time those who own property gain when they sell it. So excess money in the economy currently tends to go into speculation in real estate. Lured by bank promises of big loans and helped by a tax system that encourages property ownership, investors are buying second and third homes. This is no good for productivity. According to the Productivity Commission Dec 2011, average section prices tripled from $50,000 in 1992 to $150,000 in 2007, a fifteen-year period. But the rises in property values are not because of the effort of a landowner. It is the efforts of the surrounding community that causes the value of the land to rise. When a new railway is built the land near it rises in value. When a new business comes to town the land rises in value. The windfall should not therefore be the property of the landowner but should be publicly captured. Property speculation has particularly profitable in the land surrounding growing towns and cities.
The combination of these sick systems has resulted in increasing wealth disparity, as wealth has concentrated with banks and property owners. If we fix the money system and keep it as a monoculture, but deal to the banks with a monoculture monetary reform, landowners will further aggregate wealth and there will be inflation. House prices rise dramatically. Fix just the land system and money will concentrate with banks. Banks will “row the economy” between tight money and easy money causing booms and busts. They put up interest rates for “riskier” business loans. They buy patents, radio spectrums, copyrights, and trademarks. They bribe governments. So both issues need to be tackled together. The land and money issues intersect at one point – mortgages. So it is on this we should focus.
No. The fact that the contract gave money up to the value of the land does not change the ownership of the land, but the required Land Levy is included in the title as an encumbrance – a big one. It would be enough to drop the price of the property dramatically and make it more affordable. Because the encumbrance is on the title, the ‘owner’ then effectively becomes the guardian of the land or ‘kaitiaki o whenua’, as it should be. The owners are fully responsible for what happens there.
The Rates Voucher is a promise by the local government to accept the note for the payment of rates. If it were a note the Mayor and Treasurer would sign it. This is done interest-free at almost zero cost to local government. On the note would be printed the words “This note is valid for the payment of rates to Wellington City Council” or something similar. And ultimately they must be acceptable for the payment of rates.
If there is too much local currency in circulation it will become gradually less trusted. People will go back to the national dollar. The rationale for having a local currency backed by a promise to accept it for rates is to create the conditions for people to trust it and accept it. Therefore there has to be careful management of the amount of currency in circulation. Since councils have to buy petrol, machinery and other things that can only be bought using national currency, each council would have to decide what proportion of the rates bill would be billed in the local currency. It may be 33% for instance. If there are too many local dollars out there, the council will not be able to accept them all.
Since we are in a digital age, everyone needs a bank account and that means a special bank is needed to deal with local money. Everyone who uses Rates Vouchers would open an account, and the Council would pay the administration fees. As the new currency is designed to decay not attract interest there is no bank income. The bank would be able to lend out to locally owned businesses and of course would be there for loans on houses. These are not mortgages, but loans. If the bank lent out $250,000 for house building it would eventually be repaid $250,000.
In discussing rates below we need to bear in mind that the New Zealand situation is that most councils these days have a mixture of fixed annual charges, together with charges based on either unimproved land value or on capital value. The general trend appears to be towards capital values with a higher and higher proportion being fixed annual charges. However all this is irrelevant because we are only concerned with the unimproved value of the land now. The proposal has the effect of increasing the council revenue to so much that all those complexities become unnecessary. But Councils still have to retain a right to charge for anything they want to minimise like water use and rubbish.
First we have to ask in what currency or currencies the levies are to be paid. This important topic requires considerable discussion. Without claiming to reach an answer I offer the following seven examples.
A couple in Otaki wanted to buy a section for $127,000. The rates on the land are $800 a year. If they were to get a mortgage of $127,000 at 6.9% they would have to pay $8723 a year in interest. The total land associated outgoings would be $9723 a year. The couple then enters into a contract with the council to receive the $127,000 they needed in Rates Vouchers, and in exchange there are no further rates obligations. But in the covenant they agree to pay Council, say, $8094 a year from then on. The council could charge them for water and sewerage.
A 419 sq m section in North Epsom, Auckland, in the zone of many elite schools and within walking distance from Mt Eden village is on the market for $740,000 and its rates are a mere $1200 a year. New purchasers could go to Auckland Council for a contract where they agreed to receive Auckland dollars to buy the section in return for a hefty regular payment to Council. At 6.9% mortgage the land-associated mortgage component would have been $51,060 and their total land associated costs would be $52,260. At 20% discount they would pay $41,808. At 10% discount it would be $47,034.
A family wanted to buy a rural property worth $900,000 of which the land value was $700,000 and the rates were $1500 a year. They would have paid 6.9% interest on their mortgage of $48,300 to the bank. Outgoings would total $49,800. The Council created $700,000 of Rates Vouchers in exchange for a Land Levy of $39,840 a year. This is 20% less than they would have paid in rates and to the bank.
A couple in Auckland is buying a house in Mt Albert for $700,000. The land value was $420,000. The bank would have given them a mortgage at 6.9% so the land component of this would have cost them $28,980 and their rates were $4200 a year, a total of $33,180 a year. Their land levy was negotiated to be $26,544 or 20% lower than [banks plus rates].
1.86ha coastal residential land with further subdivisions available is for sale at Kerikeri for $1,200,000. Rates are $2430. Current outgoings would have been $85,230 at 6.9%. Discount at 30% would be $57,000 a year, at 20% $68,184 for the land levy.
A do-up home in Greerton, Tauranga is on the market for $249,000. Its land value is $146,000 and its rates are $1700. Total outgoings would have been $11,774. A 20% discounted Land levy is $9419.
The covenanted properties, being financially ‘burdened’, would then have a very much lower market value. With dropping house prices this arrangement would benefit would-be first homebuyers. According to the Productivity Commission (Dec 2011) land values are typically 60% for most Auckland, North Shore and Queenstown homes and even more for older homes in big cities, so the covenanting process would actually drop the price of the property by a whopping 60%.
Vendors when offered part payment in local dollars may be puzzled. What would they do with it? They might want to buy a house in the same area, so could offer part payment in local dollars. This chain would continue until it encounters a vendor that doesn’t want to buy a house at all. The first challenge has arisen. Who will accept this new currency? It is a fair chunk of money to spend and what is more there is an imperative to get rid of it fairly quickly.
The banks meanwhile are at their wits end. It is a PR nightmare they had dreaded. Here are all these citizens delighted with their local authorities and having sufficient income to pay their essential bills. They notice that the Citizen’s Dividend is proving highly popular and no one wants to go back to the old system. The banks will start to pressure government to stop this madness. But if several local authorities are finding that their local economies are regenerating fast and their citizens are happier, then there are now several MPs who will oppose any move to change a law. That is why it is better to do it at local authority level first before at national level. Grassroots movements well planned can all always overcome the power of centrally owned corporates. There would be just too many fires for the banks to put out all at once and they give up because they can no longer influence public opinion.
Because homeowners are not having to take a mortgage for land and dwellings but just for dwellings, the nation’s private debt declines at last. Simply shrinking the nation’s mortgage debt would be a massive economic stabiliser, because the household sector wouldn’t be vulnerable to ‘pumping and dumping’ from interest rate variations. Stabilising land and property values will be of benefit to everyone.
Many will argue that it wouldn’t work or maybe they oppose it on other grounds – these people can just stay out and watch. However they certainly won’t mind receiving their Citizens Dividend.
The huge opportunity here is how to maximise the inclusivity and mass appeal of this proposal. In this respect, in principle such a proposal (or an appropriate variation of it) represents the potential to benefit a significant M?ori population, and we would do well to consider a specific strategy to engage wh?nau (M?ori families), hap? (M?ori sub-tribes) and iwi (M?ori tribes) in the design, delivery/ implementation, monitoring and evaluation of it.
Small business would benefit once the Government has sufficient revenue to discontinue GST & company tax. Small business is crying out for someone to support them and for a stable monetary system. They don’t want the country’s investment finance going into property. Political parties with Land Levies as a policy would find this to be a wedge issue no other party has the ability to deal with. Small businesses that deal in locally sourced materials would have a major advantage.
Perhaps it would be wise to trial the scheme on a small scale before rapid expansion. The trial could occur in many different ways. The goal is to give enough of a financial “nudge” to encourage people to join the scheme at a prudent rate. There would be no shortage of potential interest, given the extent of mortgage indebtedness.
The general trends prevailing in the years following the introduction of land contracts as a new opportunity for landowners:
• Firstly, their tenants’ businesses would be less likely to fail or worker tenants to lose their jobs because of the state of the economy – land levies are a stabilising influence.
• Second, it is not proposed to bring in Capital Gains Tax. This ties up land, people don’t sell, and they just wait for a change in government and lobby against the tax.
• Thirdly, upgrading homes would become more affordable because when central government gets in on the act too, company tax income tax and GST would be reduced significantly.
• Fourthly, the asset values of the properties would be more stable because people wouldn’t be borrowing at fluctuating interest rates with fluctuating money availability.
As rates and insurance on properties rise, there is pressure on low-income earners to sell their homes and rent or move further out. But if a proportion of their rates can be paid in local currency it will take pressure off. And besides, with the local money circulating in the district, they have more hope for their future employment security. And when the community starts its own insurance company at least the price of the insurance won’t be so exorbitant.
The Reserve Bank Act does not prohibit the issuing of electronic money, only of Notes. So Rates Vouchers would have to be done electronically. Like Kiwibank’s Loaded Cards the Council owned bank could issue its own card with chips on which to load national currency and local currency.
Sovereignty and nationhood is generally closely associated with the right to issue your own currency. Is a local authority like the Kapiti Coast District Council a sovereign entity? What if it was to become part of the Wellington Supercity? Provisions for this would have to be enshrined in law and this deserves further discussion.
We can stabilise land values, reduce our indebtedness, make banks safer, help small and medium sized businesses, even out rises and falls in property prices, help prevent inflation or deflation, move to a low carbon economy, make it much easier for people to buy their first home, and reduce poverty – all by the same simple action repeated thousands of times. Moreover we have now maximised the chance for resilience in the face of threat by moving away from a monopoly currency which, together with poor tax policies, has caused so many monetary, sovereign debt and bank crises. The local authority solution is easiest because local authorities already have their revenue tied to property value. This moves it to revenue tied to land rental value. Several birds are killed with one stone. The monetary and land issues are all dealt with together and the bonus is more wealth equality and a genuine start to environmental healing. If appropriate engagement of Maori is managed so that they trust councils more, local authorities that adopt this policy will be oases of prosperity and happiness in a time of high unemployment and misery.