The bulk purchase arrangements with the United Kingdom for New Zealand's primary products gave a secure market under wartime conditions, but did not make satisfactory arrangements for any regular review of the prices which New Zealand received. Some adjustments were made to prices, but they were small compared with the rise in price of imports into New Zealand.page 379
After December 1942 the stabilisation scheme in operation in New Zealand slowed up rises in costs and enabled New Zealand farmers to produce at the bulk purchase prices. However, with the prices New Zealand had to pay for her imports rising considerably more than the prices she received for bulk purchase of her commodities, the purchasing power of her exports was falling fast. The terms of trade moved against New Zealand quite rapidly in each of the years 1941, 1942, and 1943; and by the last year the purchasing power of a given quantity of exports had fallen to not much more than two-thirds of what it had been in the years 1936 to 1938. The terms of trade were to remain comparatively unfavourable to New Zealand for the rest of the war period, not returning to pre-war levels until 1950.
Because of the need to hold down consumer prices as part of the price-wage stabilisation scheme, stabilisation subsidies to producers were increasingly necessary to offset rises in prices of imported materials. Much of the increasing disparity between import and export prices was becoming a direct burden on the stabilisation scheme.
Apart from the strain on the stabilisation scheme, the balance of payments situation would, under normal conditions, have deteriorated rapidly when faced with the four successive years, from 1940 to 1943, in which prices for imports rose much faster than the prices New Zealand received for her exports. In the event, the very slow arrival of imports avoided a balance of payments crisis. Imports were held back by the inability of overseas suppliers to meet orders, by interruptions to shipping, and in some cases by import restrictions. Consequently there were trade surpluses in each of the years 1939 to 1942 and, in spite of New Zealand's need to meet payments under the Memorandum of Security in the latter half of this period,1 export receipts were sufficient to meet all commitments and to build up the overseas assets of the banking system. By the end of 1942 net overseas assets had increased from their level of under £7 million in December 1938 to over £40 million.
The outlook changed in 1943. In that year the value of imports far exceeded export earnings. A substantial portion of the imports were Lend-Lease goods which did not have to be paid for in overseas exchange, but the unfavourable trade balance was sufficient to bring home to New Zealanders the fact that the terms of trade had deteriorated so badly that exports had lost one-third of their purchasing power.2page 380
The comparative stability of New Zealand internal prices and costs had matched the stability of bulk purchase prices for the farm products she sold overseas. However, the stability of these latter prices, in face of rising prices overseas, was placing her at a disadvantage, not only with regard to imports which she purchased out of the foreign exchange her exports could earn, but also with regard to the recording of Reverse Lend-Lease items which were her contribution to the reciprocal arrangement with the United States.
With Lend-Lease supplies not having to be paid for in cash, the whole of the trade and other balance of payments transactions for 1943 produced a small surplus which raised the overseas assets of the banks to £46·3 million by the end of the year. Nevertheless the deteriorating relationship of export prices to import prices was considered sufficiently serious to warrant further negotiations with the United Kingdom. As has been observed, the small balance of payments surplus in 1943 was made possible by reduced private imports. Imports for civilian use had fallen to not much more than half of the average annual volume which had arrived for the years 1936 to 1938. This represented a sacrifice of living standards by the civilian population of New Zealand which was drastic, even by wartime standards, and would become intolerable if continued into peacetime conditions. It became obvious that, if New Zealand allowed the deteriorating relationship between her export and import prices to continue, she would be placed in an impossible position when the war finished and Lend-Lease arrangements came to an end.
‘Discussions are at present taking place in London between the British Government and the Minister of Finance (Mr Nash) on the relationship between prices of manufactures sent to New Zealand and the prices received for the Dominion's products. It has been the aim in New Zealand since the war started to endeavour to stabilise prices as far as possible on a pre-war level. When Great Britain agreed to bulk purchase of Dominion products there was no special arrangement for reviewing prices. There have been some adjustments since, but it seems clear from the recent statement by the Minister of Agriculture (Mr Roberts), and confirmed by a subsequent statement by the Prime Minister (Mr Fraser), that prices received by New Zealand for primary produce have not kept pace with prices which this country has had to pay for goods imported from the United Kingdom. page 381 According to Mr Fraser, the issue was being raised at the time of Dunkirk, initial steps having been taken, but it was decided that, when Britain was lying almost unprotected, it was not the time to deal with such an issue. Apparently the Government feels that it is now reasonable to reopen the question. One point that should never be overlooked so far as wartime trading relations between Great Britain and this country are concerned is that Great Britain not only agreed to the bulk purchase of our primary products but also provided the transport, and bore all the costs and all the risks of transport. It is not difficult to imagine the position in which New Zealand would have been placed if it had been left to its own resources. The market would have been there but we would not have been able to reach it.
‘When President Roosevelt's Lend-Lease plan was put into operation and schemes were devised for pooling United Nations’ resources the trading position of this country was affected. We obtained a large proportion of our essential war requirements from the United States, and in return we supplied the Forces of the United States, under Reverse Lend-Lease, with goods and services. In a report to Congress in November last, President Roosevelt described New Zealand, with Australia, as the food basket of American forces throughout the South Pacific, and he gave figures showing that in the year ended June, 1943, this country supplied the American Forces, without charge, with more that 170,000,000 lb of foodstuffs. As a result large quantities of primary products that would otherwise have gone to the United Kingdom were diverted in order to meet our obligations under Reverse Lend-Lease. In a speech to the House of Representatives in July, 1943, Mr Nash, reviewing the Lend-Lease operations between New Zealand and the United States, referred more than once to the fact that the agreement between the two countries made no stipulation as to payment.
‘So far as the negotiations at present proceeding in London are concerned, no difficulty need be anticipated in reaching an understanding. They will be satisfactory both to the United Kingdom and New Zealand. There are aspects of the Lend-Lease Agreement with the United States, however, which should be carefully studied. It is necessary in the interests of reality that there should be a careful tabulation of the exchanges of goods and services between the two countries, so that a complete understanding of the position can be reached. During the debate on Lend-Lease in the House of Representatives in July, questions were raised relating to the supply of goods to the United States of America and the point was made that New Zealand should page 382 be given consideration for increased costs of primary produce since the beginning of the war. In his reply, Mr Nash agreed that there was something to be said for that point of view. “I do not want to criticise the United States of America,” said the Minister, “because they have some very competent economists and other men in the various Departments of that country; but to the extent that any country allows prices to rise above normal levels, which prices are likely to later come down, then there will be a repetition of the disastrous trouble we had in 1929–35. We have a better economic basis in our price-level than in most countries. Because of that, I think there is a question whether the commodities they supply to us should be measured by the same tape as we use in supplying commodities to them.”
‘Speaking in a “general way” of transactions governed by Lend-Lease, Mr Nash informed the House of Representatives: “There is no agreement for actual payment in cash”. But notwithstanding this, it is desirable that transactions should be set out in terms that truly represent the values of goods exchanged. President Roosevelt himself has freely acknowledged that current figures do not comply with this requirement. In his report to Congress he said of the statements submitted by British Commonwealth Nations and the translation of pounds to dollars: “This may be misleading because the rate of exchange used cannot, especially under war conditions, always reflect comparable values in terms of purchasing power, manhours of work, or materials.” In a word, we are using different measures, and consequently may not show in true perspective the relative worths of efforts and supplies as between ourselves and the nations who help us and whom we try to aid. We must not, of course, stint our aid in any way; ability to aid alone must be our guide. But allowing for this there is every reason—if any statement at all is made—to see that it presents, as near as may be, the actual position. In Mr Nash's words again: “I think there is a good case to make in dealing with the figures between one country and the other. I think that is a case we can legitimately make.” Even to avoid future arguments, and arguments prejudicial to future trade, there should be an effort to clarify the position.’
1 Payments under the Memorandum of Security for March years were, in millions, 1940–41 £1·5, 1941–42 £9·9, 1942–43 £9·3, 1943–44 £11·4, 1944–45 £6·2, 1945–46 £22·5.
2 Compared with before the war.