CHAPTER 1 — Pre-war Economy
Men Not Wanted
WHEN Prime Minister Michael Joseph Savage attended the 1937 Imperial Conference and declared that the causes of war were economic, New Zealand was hardly out of the throes of bitterness generated by the great economic depression of the thirties.
It is probable that memory of the depression was the strongest influence leading to the overthrow of the Coalition Government at the 1935 general election and its replacement by Savage's Labour Government.
Even in 1935, two years after the worst year of the depression, the economy was unable without Government assistance to employ more than eighty-nine out of every hundred men. Eleven in every hundred in the labour force were wholly or partly a charge on the Unemployment Fund. Against this background Savage's Labour Party offered a forceful policy for expansion of production. It was a strongly socialistic policy containing much which was repulsive to many in a predominantly private enterprise economy; but it convincingly promised a determined attack on the sickening spectacle of continued large-scale unemployment. It swept the party into power.
Actually, unemployment had shown quite a strong falling tendency before Labour took office, but this tendency was accelerated in the following two years. The numbers of men wholly or partly a charge on the Fund had fallen from an average of fourteen in every hundred of the labour force in 1933 to twelve in 1934 and to eleven in 1935. In December of that year the Government changed page 5 and, in the first two years of Labour administration, the fall continued, to reach nine in every hundred in 1936.1 By 1937 it was nearly as low as six.
This was the position when Savage went to the Imperial Conference in 1937—rather more than 6 per cent of unemployment or assisted employment, well under half of the 1933 level, but still considerably above the New Zealand long-term average.
In the next two years there was a distinct danger that the tide of improvement would ebb. In 1938 the numbers who were wholly or partly a charge on the Employment Promotion Fund decreased only insignificantly. There was, however, a considerable increase in the proportion who were working full time in industry with assistance from the Fund, accompanied by a corresponding decrease in numbers on rationed work or sustenance without work.
In 1936 the new Labour Government had emphasised its more positive outlook on employment problems by passing the Employment Promotion Act 1936, to supersede the Unemployment Act 1930. Administration passed from the Unemployment Board to the Employment Division of the Department of Labour which was, in time of war, to become the National Service Department. Emphasis was to be on the permanent extension of employment avenues rather than on temporary relief.
In 1939 a further major step was taken with the merging of the Employment Promotion Fund into the Social Security Fund, in terms of the Social Security Act 1938. This was illustrative of the central place which Labour gave to welfare policy and the tendency to bring together as far as possible for co-ordinated attention the widening range of Government provisions for people with special needs or responsibilities.
With the 1939 change the nature of unemployment benefits also changed and the sequence in these statistics was lost. The new series of information showed comparative stability into 1940, but in September 1939 war came. Its demands for men for the armed forces were soon to alter the whole outlook on manpower. According to the National Service Department,2 New Zealand entered the war with 19,000 men on unemployment benefit or in subsidised work.page 6
Chart 1 shows changes in numbers receiving various types of unemployment assistance.
1 Answering a question about the number on unemployment relief, Minister of Labour H. T. Armstrong said in April 1936:
‘These are the latest available figures up to the 14th March last: Under Scheme Number 5, rationed relief, 15,704; on sustenance, 14,443; gold prospecting, 2,328; afforestation, 1,005; farm subsidy schemes, 3,117; Public Works - roads, aerodromes, etc. - 8,435; local bodies - subsidised employment - 2,831; small farms development, 1,257; miscellaneous, 3,537; a total of 52,657.’
New Zealand Parliamentary Debates (subsequently NZPD), Vol. 244, pp. 360–1, 16 April 1936.
The keys to Labour's employment promotion policy were higher personal incomes and expenditure, together with extended public works and housing programmes. The Finance Act 1936 restored public service salaries and the wage rates payable under awards to those prevailing before May 1931, when the first 10 per cent cut on wages had been made under depression conditions. Other wages were to follow suit. By 1937 wage rates, as measured by the Nominal Wage Rates Index, were 21 per cent above the 1935 average.
Various types of monetary provision made by the State were also increased and the range of benefits extended. Pension payments increased steadily from £3·3 million in the year ended March 1935 to £6·8 million in the year ended March 1939. In the following year, augmented by new Social Security provisions, the total of page 7 pensions and Social Security payments moved to £12·3 million and in 1940–41 was to reach £14·3 million, which was well over four times the 1935 level.
The numbers of men engaged on public works projects increased rapidly from under fourteen thousand in January 1936 to over nineteen thousand in January 1937.
It is true that, in the early stages, the Labour Government concentrated on transferring men from subsidised employment and part-time employment to full-time public works jobs. For example, highways and road works being carried on at the instigation of the Unemployment Board were transferred to the Public Works Department as from 1 April 1936.
An interesting sidelight on this is thrown by remarks made in September 1936 by Minister of Works Robert Semple:1
‘I was quite prepared to find, owing to several years of financial depression, that there might not be a settled policy and I make due allowance for such difficulties, but I was not prepared to find that the whole of the public works activities had been converted into a system for relief of unemployment.’
Earlier Mr Semple had given a more detailed report. He said:2
‘When I assumed office approximately twelve thousand men were employed, the majority of them being relief workers. The complement today is sixteen thousand men, and when the full programme is in active operation I anticipate considerably increasing the number, even with the introduction of much more plant than is now in use. The existing practice of men for public works being sent direct to the Public Works Department by unemployment bureaux in the different centres, and without any regard whatever to their fitness for the work or their capabilities, will cease; in fact, a reclassification on the existing jobs must be done.
‘…Practically all of the works which have been carried out by the Department for several years have been classified as relief works, and the basic rates of pay have been 12/- per day for married and 9/- for single men. Under the new agreement all works will in future be classed as standard works, and the basic rate of pay for labourers will be 16/- per day and single men will receive the same rate of pay as married men.’
In spite of the prominence given to these transfers of status, often amounting to a reversal of what had been done in depression years, much of the expansion represented a genuine extension of works activity. Moreover, it was associated with mechanisation and page 8 labour-saving methods, so that more than ever before was being achieved by the use of labour. In the next two years there was a further steady rise in numbers employed, to reach 22,800 in January 1939, but then a slight fall took the figures back to 21,200 in January 1940, four months after the outbreak of war.
While the Labour Government placed reduction of unemployment high on its programme, the employment promotion aspect of public works was, in the immediate pre-war years, overshadowed by a vigorous policy of improvement of highways, land development, school buildings, aerodromes and other works using the best available equipment.
Chart 2 shows public works employment from 1935 to 1940.
Public works expenditure which, under depression conditions, had fallen from a level of about £8 million a year to under £2 million in the worst depression year, 1932–33, showed no notable recovery until 1936–37 when it increased to over £4 million. It moved to £7 million in the following year and to over £10 million in 1938–39, taking it above pre-depression levels for the first time. Not unnaturally the Government's public works programme page 9 required considerable administrative planning and could not be accelerated rapidly. The housing programme took even longer to gain momentum.
Economic recovery was assisted in the first two years of Labour's term of office by increases of £10 million a year in export earnings. The next two years were not so satisfactory. Export earnings fell and, for 1938 and 1939, stayed £8 million below their 1937 level. Though still £12 million above what they were in 1935 when Labour took office, they were inadequate to pay for the rising cost of imports. The depressive influence on farm incomes was alleviated to some extent by the fact that guaranteed prices held up dairy incomes in 1938–39. This was the first year when guaranteed prices acted as an appreciable offset to the effect of overseas price falls.
The Employment Promotion Fund, after paying out about £4 million a year for each year from 1932–33 to 1937–38, spent over £6 million in 1938–39 and it was not until the first year of war that payments fell below £3 million. Employment promotion was necessary and costly up to and after the outbreak of war.
1 NZPD, Vol. 247, p. 198.
2 NZPD, Vol. 245, p. 144, 14 May 1936.
Provision of state-owned rental dwellings was an important plank in Labour's election platform. In the year ended March 1938 the first four hundred units became available under the scheme.
This housing construction was financed largely by Reserve Bank credit, a use of bank credit which provided extra ammunition for the inevitable cross-fire of criticism of any state housing scheme.
The dwellings were let at low rentals, admission being subject to a means test. Strictly uneconomic,1 these rentals were given a semblance of relationship to costs by charging only a nominal rate of interest on bank loans to the Government for housing purposes.2 Needless to say this concealed form of subsidy did not escape the attention of the critics.
The programme for construction of state housing was stepped up rapidly and, by the outbreak of war, about three thousand of these dwellings were becoming available each year.page 10
Besides providing housing for the more needy members of the population, the state housing scheme added to the total demand for construction work and, with the augmented public works programme, helped to absorb unemployed labour.
1 And to become more uneconomic as rentals remained fixed while costs rose.
2 Later there was considerable controversy over the actual method of financing state housing (see for example NZPD, Vol. 291, p. 2691 and onwards). Loan money, once borrowed, becomes available with other monies for a variety of uses and it is difficult, if not impossible, with most state borrowing to say that the money was raised for any particular purpose, or to distinguish the uses to which it was actually put, but the above paragraphs give a reasonable indication of what was done. The rate of interest charged averaged about 1 1/4 per cent.
Towards the Welfare State
Some of the public works projects inaugurated by the Labour Government in the late 1930s were spectacular, and several, notably the Ngauranga Gorge road and the coast road from Plimmerton to Paekakariki, are still outstanding as monuments to New Zealand's most colourful Minister of Works, Robert Semple. However, in these four pre-war years of Labour government probably the greatest influence on the New Zealand economy was the Social Security Act 1938.
Coming into force in April 1939, this Act provided for a system of monetary benefits on a contributory basis and introduced medical, hospital and maternity benefits. Contributions were to be made at a flat rate on virtually all income. Benefits were payable to those with specific needs or commitments, irrespective of the amount of their previous contribution. The most spectacular change was that medical, hospital and maternity benefits were not to be subject to means test and that superannuation benefits, initially at a low rate, were also universal. The universal superannuation benefits were to co-exist with the more liberal age benefits which were still subject to means test; but they would gradually approach the age benefits in value and ultimately supersede them. Family benefits at this stage remained subject to means test, but in 1940 were extended to an extra child so as to be payable for each child after the first, where the income was under £5 a week.1 The Act also extended the range of other types of benefit with the express purposes of providing for all persons who, through youth or age or misfortune, were not able to share adequately in the national output.
The Social Security Act aroused widespread controversy. As we have seen, its immediate effect was to increase the cost of benefits from £6·8 million in 1938–39 to £12·3 million in 1939–40; but the promise of an increasing rate of universal superannuation gave a warning of considerably heavier commitments to come. There were many who thought that the scheme must break down under its own weight, especially in times of unfavourable overseas trading conditions.
1 Previously payable to each child after the second.
Many interesting comments are recorded in Hansard where, for example, reference is made to statements by the Farmers' Union:1
‘The Union is rightly concerned respecting the large addition to the imposts of the Government and their possible effect upon the already seriously depleted sterling funds in London. The Union also directs attention to the effect it may have upon New Zealand's credit in London; especially so as £17 million of loan money will fall due in the first year the proposed scheme comes into operation.’
The Farmers' Union said, further:
‘We would emphasise that in our opinion to proceed with the scheme along the lines of the present proposals is imprudent financially. The prospect of a possible £15 million increase in general taxation at some future time is a possibility which cannot be viewed other than with the gravest misgivings.’
The Associated Chambers of Commerce were no less condemnatory. They said:2
‘The Prime Minister and the Minister of Finance put forward the hypothesis that maintenance of the same rate of increase in the exports of New Zealand in the next 40 years as in the last 40, would enable the growing costs to be met. We consider that to place any reliance on such a supposition, as a basis for maintaining the scheme, would be reckless.’
The possible future increase of £15 million in general taxation was to prove to be a masterpiece of under-estimation. Twenty years later social security benefits were to cost an extra £68 million a year. On the other hand the volume of exports was to increase by well over 50 per cent in the same twenty years, justifying the confidence of Michael Savage and Walter Nash.3
Chart 3 gives some impression of the impact of Labour's social security policy on the cost of benefits and pensions.
1 NZPD, Vol. 252, p. 371. Quoted by Hon. Mr Cobbe.
2 Ibid. Quoted by Hon. Mr Cobbe.
3 In this 20-year period, export prices were to rise by 208 per cent and consumer prices in New Zealand by 119 per cent. The £ in 1959 would have less than half its 1939 purchasing power.
Unfortunately this internal effect was not the only effect of welfare provisions. The resulting higher national total of spending also raised the propensity to spend on imports, and tended to create overseas exchange difficulties in years when export prices were unfavourable.
1 This encouragement to production tended, while there were unused resources, to offset inflationary aspects of the scheme.
Savage himself was the driving force towards the expansion of social security benefits, just as Robert Semple was the spearhead of public works expansion. However, behind the scenes, as Minister of Finance, Walter Nash—to become Prime Minister two decades later—was effecting a dramatic change in Government financing and financial control in order to make all these changes in works and social security policy possible.
New Zealand entered the war with her welfare provisions leading the world and being rapidly expanded. Wartime changes were to be minor, but generally in an upward direction.
Changes in Farming
For the farmers, crisis had followed crisis in the 1930s. No sooner were they free of depression conditions than there was a threat to the continuance of the free market for their products in the United Kingdom. It was only after very strong protests from New Zealand farmers that the United Kingdom Government in 1934 abandoned a proposal for an import quota on butter and cheese, and instead decided to subsidise United Kingdom milk production. Imports of meat were not so lucky. A compromise system of short-term quotas operated from 1935 until it was superseded by wartime bulk purchase arrangements.1
Meanwhile the economic depression had had its influence on many facets of Labour Party policy. It was the income-reducing effect of overseas price falls, perhaps more than their effect on overseas funds, which had enabled the world depression of the early 1930s to communicate itself so fully and disastrously to New Zealand. The Labour Party pledged itself to protect farmers against instability in their incomes.
As part of its policy of insulation, it offered the farmers a guaranteed price for their products which would make them, in the short run, independent of price fluctuations in overseas markets. As it turned out, producers of meat and wool preferred to be without the guaranteed price, and the system applied only to dairy products.
The guaranteed price for dairy products, introduced in August 1936, very quickly came under pressure when, in 1937–38, rising overseas prices led to a surplus in the account and the farmers promptly demanded a higher payout. They got it.
1 New Zealand's allocations under the short-term quota system were not unduly restrictive.
In the following year prices fell and the guaranteed price protected dairy farmers against the fall, so to some extent insulating the internal economy. But this insulation did nothing to protect New Zealand's overseas reserves; in fact it may well have been one of many influences leading to continued high importing and to an exchange crisis towards the end of 1938.
Meantime a more lasting change had been taking place in farming—a change which was to have a material influence on its manpower requirements under war conditions. The industry was being very rapidly mechanised and, stimulated by research work by the Department of Agriculture and the Department of Scientific and Industrial Research, very considerable improvements in methods were being made.
Between 1936 and 1939 the number of agricultural tractors increased by 69 per cent, and in 1940 there were almost twice as many tractors in use as in 1936. This was an amazing transition in only a four-year period. The number of electric motors on farms increased by 60 per cent between 1936 and 1940. Milking machines had been in quite widespread use by 1930, and after 1933 their numbers increased some 770 a year until there were nearly 29,000 by 1939. But, more important, hand stripping, which had always been regarded as an integral part of machine milking, was being eliminated on some farms. The Dairy Board reported:1
‘In November and December, 1941, a survey was made of approximately thirty herds where no hand stripping had been carried out for one or more years…. The production data indicated very little, if any, fall in output per cow as a result of no hand stripping, whether analysed on the basis of the same cows before and after the introduction of non-stripping or on a herd basis.’
Because of these changes, farming, which had in earlier years steadily increased its labour force, was now able to maintain ever-increasing production with a comparatively stable labour force. The change in rate of growth of labour requirements for farming was apparently not widely recognised until after the war and this misunderstanding was to have a major effect on wartime manpower planning.
Chart 4 shows changes in farm mechanisation between 1929 and 1940.page 15
Dependent or Independent Economy?
In pre-war years the United Kingdom was taking four-fifths of New Zealand's exports and supplying nearly half of her imports. Nearly another quarter of New Zealand's imports came from other Commonwealth countries. Commonwealth trading arrangements had been formalised in 1932 in the Ottawa Agreement, and for New Zealand this meant, in the main, the exchange of tariff and quota preferences with the United Kingdom. In effect it gave New Zealand an assurance that the United Kingdom would continue to absorb the bulk of her exports free of duty and quantitative restrictions, while New Zealand agreed to maintain a 20 per cent tariff preference on most imports from the United Kingdom.
These arrangements, while ensuring a market for farm products, gave New Zealand no protection against price changes on a United Kingdom market which was from time to time affected by over-supply.page 16
In its 1935 election campaign the Labour Party had promised to insulate the New Zealand economy against external economic fluctuations. In the first two years of Labour administration, insulation would have involved siphoning off increases in export earnings. The Coalition Government had left the country with substantial overseas reserves. Then in Labour's first year of office export prices rose 14 per cent, and by a further 15 per cent in the second year—truly a most favourable start for any Government's term of office. But in these years the only steps towards insulation were some diversification of the economy and the accumulation of £0·6 million in the special account set up under the guaranteed price scheme for dairy produce.
Between 1936–37 and 1937–38 export prices fell by more than 5 per cent, and Labour's promise was put to the test. The fall in export prices continued into 1938–39, with a further reduction of 3 per cent. These falls were serious but still left export prices at 19 per cent above their level in 1935 when Labour took office. In 1938–39 the dairy farmers' guaranteed price insulated their incomes against the fall, the Dairy Produce Account going into deficit by £1·9 million for the purpose. But the most serious price fall was in wool, which in 1938–39 realised 35 per cent less than the peak prices of 1936–37. Here there was no insulation.
The Government carried on with its expansion policy as if the economy were in fact insulated.
Fortunately import prices were still below their pre-depression levels and the purchasing power of a given quantity of exports increased by 23 per cent between 1935 and 1937. Between 1937 and 1939 this purchasing power, or terms of trade, decreased by 8 per cent, but this still left it 13 per cent above the 1935 level.
However, it was soon to become apparent that insulation would require either unlimited overseas funds or irksome internal restraints.
In 1936 the value of exports had moved above the 1929 level for the first time, when £57 million was earned. The next year earnings increased to £67 million but fell away again to £58 million in 1938 and 1939. Meantime imports, stimulated by increased internal purchasing power and augumented by extra orders of heavy equipment for the public works programme, had increased rapidly up to 1937. The rapid mechanisation of farming also added to the expansion of import requirements.page 17
Imports and exports are shown in Chart 5. Export receipts have to pay for a substantial unfavourable balance of invisible items, such as debt servicing, as well as to meet the cost of imports.
When export earnings fell in 1938, imports remained high, leading to successive falls in the overseas reserves of the banks. This influence, combined with some flight of capital as a result of a loss of public confidence, resulted in the overseas reserves in December 1938 falling to the dangerously low level of under £7 million. The Labour Party's promise to insulate the New Zealand economy was now under a most exacting test. Disaster was avoided by resort to exchange and import controls at the end of 1938, but, even so, New Zealand entered the war with overseas reserves still at an extremely low level. They were only £16 million in December 1938, £20 million below their December 1935 level. Changes in net overseas assets of the banks are shown in Chart 6.page 18
Import controls were a direct restriction on the freedom of action of a considerable economic group and must have seemed a high price for them to pay for the attempt at insulation. But the Labour Party seems to have been tolerant to this form of control.1 It offered secure protection for the rapid expansion of manufacturing which would be essential if the production base of the economy was to become broad enough to make insulation practicable.
Whether the electors would have tolerated import controls was not really put to the test at this stage. Before there was another election, import controls, along with many other controls, were to become necessary to protect the war economy.
Insulation against overseas economic disturbances had not proved so easy. The country had been subjected to import restrictions and, even with these restrictions, there was still considerable danger of financial disaster in New Zealand's external relations. It may not be fair to say, as some have said,2 that the war saved the Labour Government from financial disaster externally, but it is certain that a very crucial testing period was avoided when war came and completely changed the influences on the external economy.page 19
1 Some members had advocated it for many years.
2 NZPD, Vol. 256, p. 446.
Diversification of the Economy
In the depression, factory production had fallen by 19 per cent while farm production remained comparatively stable. In fact 1932–33, which in many respects was the worst year of the depression, saw a sharp rise in farm production. Nevertheless there was, in the 1930s, a definite indication that it might not be too long before manufacturing overtook farming as New Zealand's major producer.
Manufacturing output made its first major recovery in 1934–35 when there was a 14 per cent increase over the previous year. In 1935–36 there was a further 9 per cent increase and in 1936–37 a 14 per cent increase. This brought the level of factory production to 53 per cent above 1931–32, which had been the lowest year in the depression, and to 30 per cent above the pre-depression level of 1928–29. After 1936–37 the rate of increase tapered off, with a 7 per cent rise in 1937–38 and 5 per cent rise in 1938–39. In the following year, aided no doubt by the exchange restrictions, which became effective in December 1938, and the supporting quota restrictions on imports, the increase in manufacturing production was 10 per cent.
Chart 7 shows changes in the volume of manufacturing output from pre-depression to pre-war years.page 20
In accordance with the Labour Government's declared policy of expanding production, a Bureau of Industry had been set up in 1937 to plan new industry. The Bureau discussed and was interested in varying degree in the establishment of a number of new industries. However, it is likely that the shelter given, from 1938, by import restrictions did much more than the Bureau towards the diversification of industry. It was Labour's intention to expand industries other than farming, in order to make New Zealand less dependent on overseas sales of a narrow range of farm products. Quantitative control of imports gave the opportunity for considerable direct influence in this direction.
Import controls were to give fertilisers and other farm requirements first priority, then capital equipment and raw materials for industry. However, there were many major consumer goods such as tea, sugar and petrol which it was politically inexpedient to cut back in time of peace. Thus the range of preferred items was very wide, and considerable cuts were necessary in less favoured items. Industry in New Zealand tended to fill the gaps. The result was certainly diversification, but often in a rather haphazard way.
Even before import controls, manufacturing was gathering strength and, in spite of the depression, output increased well over 50 per cent in the decade preceding the war. The rapid upward movement of factory production in the late thirties—an increase of 36 per cent in the four years from 1935–36 to 1939–40—was no doubt assisted by other Labour policy measures which increased consumer spending and also made direct demands on the economy through the expansion of public works.
New Zealand entered the war with a wide range of manufacturing industries. Some were still in the embryo stage, but, faced with extra wartime demands, they were to fill many gaps left by the preoccupation of overseas suppliers with their own war requirements.
On the financial side, one of the outstanding influences of the pre-war period was the very sharp lesson which had been given during the depression on the pitfalls of allowing overseas indebtedness to rise too high. Falling export earnings in the depression years had resulted in overseas debt servicing absorbing well over a quarter of all export earnings. What remained was quite inadequate to pay for imports. Relief came in due course with rising export prices, assisted perhaps by depreciation of the currency in 1933. Borrowing continued on a reduced scale until 1933 and, in 1934, there were some repayments of overseas debt.page 21
The lesson was that it was obviously bad policy for any Minister of Finance to allow overseas debt servicing to loom relatively so large again. This made a profound impression on the Labour Party, which was to show a marked reluctance to borrow overseas, even under stress of war conditions. Some economists and others have not taken the same lesson from the depression and there has been pressure for renewed overseas borrowing and quite sharp criticism, on occasions, when overseas indebtedness has been reduced.1
In accordance with its declared policy, the Labour Government nationalised the Reserve Bank in 1936, but there was not very much use of Reserve Bank credit until June 1938. Government net indebtedness to the banking system as a whole increased by less than £4 million between March 1935 and March 1938. However, in 1938–39, advances to the Government began to rise and Government indebtedness increased by nearly £18 million between March 1938 and March 1939.2
Chart 8 shows Reserve Bank advances to the State and emphasises the rapid upsurge after the second quarter of 1938. Government securities held by trading banks were also increasing.
1 NZPD, Vol. 273, p. 337. Also Vol. 282, p. 1686, and Vol. 292, p. 2108. As time passed and export prices rose, repetition of depression difficulties would naturally seem much more remote.
As might have been expected, there was very considerable public criticism at the increasing use of bank credit by the Government.1 All sorts of national disasters were foretold. Some loss of public confidence certainly resulted, aided no doubt by the evidence of overseas difficulties offered by falling overseas reserves. There was some flight of capital from New Zealand, aggravating the overseas reserve situation. To bring the results nearer home, Post Office Savings Bank deposits fell sharply, cutting at an alternative source of government funds. In the two years from March 1938 to March 1940, withdrawals exceeded deposits by £8 million.
In 1939–40 Government indebtedness to the banking system increased by a further £12 million, but part of this sum was required for war purposes.
Rising Retail Prices
At the outbreak of war, retail prices were 25 per cent above their 1933 level and had been increasing steadily. After a first tentative increase of a little over 1 ½ per cent in 1934, annual price increases had been around 3 or 4 per cent, except for the increase of nearly 7 per cent in 1937 which was probably attributable in part to the general wage increases of the previous year. The rate of price increase was fast.
There were considerable inflationary influences on the economy, especially after the Labour Government commenced its legislative programme in 1936, but unemployment was being steadily reduced and New Zealand's production was expanding. In other words, a considerable portion of the extra spending potential was being absorbed by extra production and reduced unemployment, so it is a little surprising that the rate of price increase was so rapid.
In this context, however, it should be noted that, in 1939, retail prices had still not reached the level of the highest pre-depression year. In the 1920s prices had been relatively stable, fluctuating by only 4 per cent upwards or downwards, but between 1929 and 1933 they had dropped by a fifth. By 1939, after six successive years of rises, prices were still just a little below the average for the 1920s.
Chart 9 shows price changes between 1920 and 1939.page 23
Living Standards Rise and Fall
What was happening to living standards while these momentous influences were changing the economy? Goods available increased steadily from 1931–32 to 1937–38 but then fell slightly under the influence of falling overseas earnings and import restrictions. However, goods supply part only of people's needs.
There is no comprehensive measure of living standards; all the statistician can provide is an approximate measure of the physical things which people use. These figures, taken on a per head basis, give some indication of potential living standards. The depression year 1931–32 stands out as a low point in the series and a good deal of the immediately following increase represents post-depression recovery.
One of the features of the depression period was that at the very time when overseas price changes were reducing the ability of New Zealand exports to purchase overseas manufactures, New Zealand's own production of manufactured goods was also drastically reduced. Expressed in 1938–39 prices, goods to the value of £116 million were available for use in New Zealand in the June page 24 year 1929–30.1 This was made up of £69 million which remained from local production after allowing for exports, together with £47 million worth of imported goods. Imports (again valued at 1938–39 prices) fell to £27 million in 1931–32 and, partly as a result of an £8 million fall in local production, goods remaining from local production after exports fell to £57 million. Thus a fall of £20 million from imports was accompanied by a fall from local production, and the volume of goods available for use in New Zealand fell staggeringly by 27 per cent in these two years.
Thereafter the volume of goods available for use in New Zealand increased slowly until 1933–34 and then rapidly until 1937–38. In the next two years it fell once more, as a result of declining imports.
Chart 10 shows changes in the volume of goods available and also in goods available per head of population, and throws some light on the more material aspects of living standards. It is of interest that the 1929–30 volume available per head was not again reached until 1936–37.page 25
Goods available per head reached a low point in 1931–32 and then increased yearly, accelerating in the period 1934–35 to 1936–37, with a more moderate increase in 1937–38. However, overseas prices fell, and there was not sufficient insulation to prevent falling export earnings from pulling down living standards by 2 per cent in the following year. This was only a forerunner of more drastic cuts in living standards which would become necessary under war conditions.
1 New Zealand Official Yearbook, 1945, p. 598.
Pre-war Economic Crisis?
In forming judgments about the pre-war situation, proper weight must be given to the fall in export earnings in 1938, which was one of the causes leading to import restrictions. It is equally important not to overweight this influence. Export earnings averaged £57 million a year for the years 1935 to 1939 as compared with £41 million a year in the preceding five years, 1930 to 1934. This is hardly a fair comparison, as the latter five years included the depression. However, in the pre-depression years 1925 to 1929, export earnings had averaged £52 million. The average for the immediate pre-war period 1935 to 1939 was 10 per cent above this level and, in the conditions of the time, this cannot be regarded as an unsatisfactory result.
The year 1937, when export earnings reached nearly £67 million, was in fact an all-time record up to that point, and the year 1938, to whose waywardness the imposition of import controls has been attributed, was then the highest year of any on record, except 1937. Looking back, therefore, it is difficult to see how New Zealand could have got herself into such financial difficulty externally, unless she was pushing her internal resources too hard or building up an excessive money demand which was spilling over into importing.
The internal economy was not under extreme upward pressure. Numbers unemployed and in assisted employment were still as high as 19,000 at the outbreak of war. Although some economists at the time referred to this as full employment, war and post-war experience was to show quite clearly that full employment in New Zealand could bring the unemployment level down to hundreds rather than thousands.1
With bank credit being extensively used internally, those who believed in more orthodox financial methods not unnaturally lost confidence in New Zealand's ability to remain solvent. This was brought sharply home to the Government by the flight of capital from New Zealand, and later by the difficulties Mr Nash had in 1939 in finding suitable funds in London to repay a maturing loan. So stringent were the repayment conditions Mr Nash was forced to accept that there was some doubt whether New Zealand would be able to meet them. A Round Table article said:1
‘The Minister of Finance (Mr Nash) during his recent visit to London, arranged that the £17,000,000 which falls due on January 1, 1940, would be reduced to £16,000,000 on due date, and the balance repaid in half-yearly sums amounting to £2,000,000 in 1940–41 and £3,500,000 in each of the four succeeding years, less any amounts the bond holders elect to convert. He also arranged a loan of £5,000,000 from the United Kingdom Government for defence and other public purposes; also an export credit of £4,000,000.
‘Although expressions of gratitude for the assistance given by the United Kingdom Government have been made in many quarters, serious doubts have been raised as to whether the temporary relief afforded will enable New Zealand to weather the financial storm into which she has sailed.
‘It is generally recognised that unless there is a sharp rise in the price of primary products, New Zealand will have to make a stern effort of national self-denial in order to meet the capital repayments and also find the £12,000,000 annually required to pay overseas interest, freights and other obligations….’
This chastening experience stiffened Labour's determination not to become further dependent on overseas capital and may have been in large measure responsible for the almost complete reliance on internal sources to finance New Zealand's war effort.
In its domestic policy the Labour Government had drawn extensively on bank credit, but, in terms of welfare provisions, new public works, extra housing and increases in production and employment, a very great deal had been done. These achievements justified, indeed required, some expansion in the monetary base of the economy, but the expansion seems to have been overdone. Even so, it is possible that New Zealand could have weathered the resulting financial storm. This was never really put to the test. War was declared the day before Mr Nash returned from his mission.
1 Round Table, Vol. 117, December 1939, p. 226.