Not that long ago, New Zealand's economy was built on sheep. There was only one real export commodity and one real market. We were asking for economic trouble, and in the late 1960s - when the wool price plummeted by 40 percent overnight - we got it.

Photo: Alexander Turnbull Library

If you’d asked them at the start of the year, most Kiwis would have reckoned that 1966 looked like being a cracker.

And for the most part, it didn’t go too badly.

In March, Country Calendar debuted on the telly. In April, the Queen Mum popped in for a cup of tea and a pikelet. In May, sadness over the death of Māori King Te Korokī Mahuta was tempered by excitement at the coronation of his daughter Princess Piki. That winter, the All Blacks downtrou’d the British Lions 4-zip and Maria Dallas, the pride of Morrinsville, had a huge hit with her song ‘Tumblin’ Down’.

New Zealand in the 1960s had one of the highest standards of living in the world with near-full employment and low inflation. Politically, we were the picture of stability; National Party leader Keith Holyoake was about halfway through his 12-year run as Prime Minister and eyeing-up another win in the general election later that year.

'Steady as she goes' was the motto. We were rich, a bit boring and everyone was as good as everyone else. Sure, we had compulsory military service, the death sentence for treason and it was only in 1961 you could order a glass of wine with your meal, but there was no need to bust a gut worrying about stuff.

Or so most people thought.

Cracks, though, were starting to appear.

Photo: Alexander Turnbull Library

Anti-apartheid protests opposed South African sporting teams coming here and us going there. Prison riots had broken out across the country the previous year and the police were concerned enough about violent crime to establish the Armed Offenders Squad. Radio Hauraki took to the seas to break the state monopoly on broadcasting.

Thousands marched to protest our troops being sent to Vietnam and when US President Lyndon Johnson visited that year, a huge crowd gathered to cheer but a loud group of roosters booed him, too. Vietnam became an election wedge between National and the opposition Labour Party, but not enough to change the government. National were returned in November with an eight-seat majority but shockingly, had lost the previously safe seat of Hobson to the Social Credit Party.

Welcoming the Queen Mother to New Zealand, Governor-General Sir Bernard Ferguson, praised her as a source of strength and comfort in “the world of change and uncertainty in which we live today”. Did he know something we didn’t? Because before the end of the year, our economy would come, well, tumbling down.

Photo: Brian Easton.

Economist Brian Easton was 23 years-old in 1966. He remembers 60s New Zealand as a nice place but insular and a bit narrow.

“We were a very egalitarian people. There was a lot of social cohesiveness, partly by ignoring minorities. Māori and women were not high on our agenda. And economically, we were insulated.”

Insulated by wool. Coarse wool, to be precise, which made up 40 percent of our export revenue. Sheep meat was big for us too. In short, all those jokes about Kiwis and sheep? Justified.

That wool wealth meant we could stiff-arm the world and its problems away. But, to steal a phrase Mr Easton coined, the 'end of the golden wether' was on its way and it was all our own fault.

“Unlike most OECD countries we had not begun to liberalise our economy following the war.”

New Zealand had an economy even more tightly controlled than its society; tight import controls, wage controls, price controls, you name it.

But we were doing just fine. Right up until we weren’t.

“Insulation works,” Mr Easton says, “except that you’re not very good at dealing with shocks and in 1966, that’s what happened.”

New Zealand’s prosperity was due to the Great Wool Boom of 1951. When the United States of America entered the Korean War, they bought up huge reserves of wool and the price tripled almost immediately. For the next 15 years, our economy rode on the sheep’s back, as well as it’s legs, loins and shoulders. If you chuck in beef and dairy, then pastoral products were around 60 percent of our export revenue. About 65 percent of those exports went to just one overseas market – Britain.

In short, we had only one real export commodity and only one real market to sell it in. It was the woolly equivalent of having all your eggs in one basket.

To protect that basket, we had the Wool Board, which would set a minimum floor price for coarse wool sales. If prices at auction went below that level, the Board would bid and, rarely, buy wool to drive the price back up again.

Photo: Alexander Turnbull Library

All booms end though, sometimes abruptly. On 14 December 1966 the auction price for coarse wool collapsed by 40 percent overnight. The Wool Shock had begun and the Board found itself having to buy a third of the total clip; about 600,000 bales.

“That was basically a cut of 16 percent in our total export revenue,” Mr Easton says.

“One dollar in six went down.”

Australia, that other great sheep nation, wasn’t affected as badly because they sold fine wools and had recently discovered a lot of valuable stuff in the ground to dig up. We were in this alone. It was a matter of diversify or die.

So New Zealand farmers got on with it.

“They went into beef and they went into forestry and they went into goats and they went into venison,” Mr Easton says.

“They began to diversify from a market signal rather than from anything the government did.”

A great change was underway. In 1965, New Zealand was one of the least diverse economies in the OECD. By 1980, we were in the middle – an astonishing achievement.

“I’ve not seen any other country that diversified as fast as that.”

But it wasn’t fun. Over those 15 years, slow economic growth meant unemployment and inflation. There were two oil shocks in the 1970s and Britain, our biggest market, told us to naff off and joined the EEC. It was all just a bloody ‘mare, really, and a wonder our economy didn’t cark it entirely.

The answers offered by politicians mostly revolved around subsidies, incentives and just making more stuff and getting it out there. That worked for a while. The diversification of our exports had done wonders, but it hadn’t done enough. By 1980 Prime Minister Robert Muldoon was looking at a bunch of bad options.

“Basically, the strategy was to liberalise on the external side, exports and so on, but the controls on the internal economy was maintained,” Mr Easton says.

“You couldn’t actually make that distinction, but that was what Muldoon tried to do. He was a very slow market liberaliser. The result was that in 1984 with the arrival of the new Labour Government there were people who very committed to liberalisation and did it very rapidly.

“With a lot of pain.”

Mr Easton says the effects of the 1966 Wool Shock went all the way to not just the reforms of the Fourth Labour government but to the first MMP election in 1996. In his opinion, neither David Lange, Roger Douglas or the Jim Bolger-led National government that followed in 1990 did an adequate job of explaining why all these deeply unsettling changes were necessary.

“So in 1993 the public said they were browned-off with government and they looked for a different way, one which would be more responsive to the public.

“And MMP was the result of that.”

Photo: National Library / Ray Pigney / Dominion Post

Over the 30 years it took for the Wool Shock to work its way through our economy, New Zealand lost about 25 percent of our relative place in the OECD. We never really got it back. And we changed as people, too.

“There’s a sense in which there’s a break in the New Zealand social tradition from a society which used to be proud to be egalitarian, to be classless, to one in which it is a much harsher, tougher, world.”

Except for Country Calendar, of course, which is still going strong.

By 1996 New Zealand looked a completely different nation to that which had wrapped itself in a protective layer of wool. Over little more than 20 years, Māori changed from being a predominantly rural society in the 1960s to being more than 80 percent urban. Women began working outside of the home in larger numbers and from the 1970s onward, immigrants arriving in New Zealand were no longer almost entirely British. As New Zealand online dictionary Te Ara puts it, immigration has “transformed the nation’s culture and values.”

Mr Easton says if diversification hadn’t occurred the New Zealand economy today would be so bad that most of us would be living in Australia.

While we talk a lot today about our reliance on dairy and tourism, he’s not convinced that’s our major worry. Our dependence on China is what he has his eye on.

“And the countries that are related to China, from South Korea down through to Australia. Probably it’s getting towards 60 percent (of our export revenue).

“If China had a major crisis we would be very vulnerable.”

This episode of Eyewitness was made using audio from Ngā Taonga Sound and Vision.