Title: War Economy

Author: Baker, J. V. T.

Publication details: Historical Publications Branch, 1965, Wellington

Part of: The Official History of New Zealand in the Second World War 1939–1945

This text is the subject of: ‘Something of Them Is Here Recorded’: Official History in New Zealand

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Bank Advance Controls

Judgments on the influence and duration of war effects are clouded also by the varying intensity of bank advance controls in the past twenty years.

Selective control of advances, by the Reserve Bank, which outlined a policy for the trading banks to follow, commenced in January 1942, the general purpose being to channel advances away from speculative and other purposes which were not connected with the war effort.

A number of people believe that Government economic policy, since the war, has tended to concentrate too much on control of bank advances as a restraint on the internal economy, and on quantitative restriction of imports as a means of correcting recurring balance of payments difficulties. These policies, while each in its own way quite effective as a broad restraint, have tended to be clumsy in their application to individual cases. It may well be that their very effectiveness on the broad front has led to their being asked to carry too much of the burden of economic restraint. However, it is fair to say that some genuine attempts to free them from control have been defeated by the failure of bankers and importers to exercise self-restraint.

Bank advances were quite well held in the late 1940s. Reserve Bank statements in 1947 and 1948 outlined policies for the trading banks to follow. Advances were to be restrained for investment and other purposes where it was reasonable to expect other sources of finance to be used.

In 1950 there was some relaxation of control. A rapid expansion of credit followed. In April 1951 advances were £45 million higher than in April 1950.

A tighter lending policy was adopted in 1951.

Advance controls were continued in subsequent years, with varied intensity and effectiveness. The 1956 Budget statement said:¹

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‘In order to reduce the level of bank credit, the Reserve Bank has maintained during the last twelve months a steady pressure on the trading banks by the use of the reserve ratio and the interest rate on trading-bank borrowing.’

However, no really effective control of bank advances was taken until late in the 1950s, when the Reserve Bank started to set targets for bank advances and to manipulate the reserve ratio requirements¹ of the trading banks, as a disciplinary measure when targets were exceeded.

Trading bank advances rose from £58 million in 1946 to £183 million in 1955; they had more than tripled in nine years.² The annual average was held below £180 million for each of the next five years, but jumped away again in 1961 to £217 million. Imports rose by £43 million in this year.

Chart 83 shows changes in bank advances.

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The unrestrained behaviour of importers and bankers when controls have been relaxed arises on occasions from a fear that controls may soon be tightened up again. This is understandable, but nevertheless unfortunate for those who would like to see controls removed. With no likelihood of self-restraint, the economy is particularly vulnerable when neither import nor advance controls are operating effectively.¹ An impetuous rush of extra imports, financed largely by bank advances, can have disastrous effects in years when export earnings do not rise.