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War Economy

Diversion of Resources

Diversion of Resources

The best available picture of the massive diversion of resources to war purposes is obtained through the national income, output and expenditure analysis. It is unfortunate that detailed national income estimates are available only for 1938–39, 1943–44, and for 1946–47 and following years. Because 1943–44 was the year when war expenditure was at its highest, it is still possible, through these records, to show some of the more important changes in expenditure patterns. In 1938–39, 82 per cent of all goods and services were used for consumption purposes and 17 per cent for the creation of capital assets. Defence took only 1 per cent.

By 1943–44 ‘defence and war’ was taking 42 per cent1 of all goods and services used; consumption had dropped from 82 per cent to only 50 per cent, and the creation of capital from 17 per cent to only 8 per cent.2 It is probable that the distribution in 1942–43 had been very similar to that in 1943–44, so that most of this drastic reallocation of resources occurred in the four years from 1938–39 to 1942–43.

After 1943–44 there was some relaxation of the pressure to divert resources, and in 1944–45 and 1945–46 about one-third of all goods and services used went to war purposes.

By 1946–47 ‘defence and war’ had dropped back, to take only 4 per cent of all goods and services used, capital formation had recovered to its pre-war proportion of 17 per cent, and consumption, at 79 per cent, was again approaching its pre-war proportion of 82 per cent.

Chart 57 shows these wartime changes in the use of goods and services.

Some of the goods and services needed for war purposes were released by cutting back other government activities. Normal government and local authority expenditure on goods and services took 13 per cent of the total used in 1938–39 and only 8 per cent in 1943–44.3 The reduction, proportionately, was almost the same as

1 The percentages used here differ from those given on p. 258. Apart from correction in the national income estimates of some of the accounting inconsistencies which crept into War Expenses Account (such as those already mentioned in this chapter), comparison is now being made with the national usage of goods and services, instead of with the national output of goods and services. Table 57 in Appendix I will make this distinction clearer. The comparison used on this page and in Chart 57 and Table 57 is believed to give the most realistic picture of the effects of reallocations of resources.

2 It should be noted that, for national income purposes, the creation of war equipment and installations does not rank as capital formation.

3 Transfers of cash to the private sector (technically known as transfer payments), such as social security monetary benefits are excluded here, because the discussion refers to the actual use of goods and services. These transfers enabled certain groups of people to purchase more goods and services than would otherwise have been possible, but they did not represent direct purchases by the Government. The net effect of this and other influences on private spending is summed up in Chart 57.

page 276 the reduction in purchases by the people for consumption. In the creation of capital assets, normal government and local authority activities were also cut back, but not so drastically as was private capital formation.1
chart of economic statistics

Chart 57

In studying the allocation of goods and services over the war years, it is relevant that New Zealand did not seek to get command over extra foreign production by overseas borrowing, but depended almost entirely on her own production, except in so far as imports were paid for by her own exports or were supplied under reciprocal arrangements through Lend-Lease and Mutual Aid. Not only was there no extensive borrowing overseas, but the tendency was for overseas assets to be built up from their very low pre-war level.2

In spite of wartime manpower and supply difficulties, worthwhile increases in output were obtained in farming, in manufacturing and in other industries. But the extra demands of war were of a higher

1 Reference here is to the use of goods and services for the creation of physical assets rather than to investments of money.

2 They had decreased in each of the three pre-war years to average only about £11 million in 1939. It was 1943 before the 1936 average of £38 million was again reached.

page 277 order altogether than those production increases. The goods and services required for war could come only to a limited extent from increased production. Most of them had to be made available by cutting back other uses.

The financial policy to encourage and support the necessary diversion of resources had to be a three-pronged one, involving raising money for war expenditure, cutting back private expenditure which would otherwise compete too fiercely for available goods and services, and taking firm measures to restrain costs and prices. These last measures would be necessary because, in spite of all other restraints, the remaining demands would still press too heavily on available resources. At the same time the private producer and his employees had to be left with sufficient incentive to maintain and increase production.

These were truly formidable requirements, considering the magnitude of war needs.

This chapter set out to deal with the financial cost of war, but, in history, money is meaningless except in terms of its command over contemporary goods and services. So, from the start, the most important thing the finance chapter had to do was to sum up, as far as money values could measure them, the massive diversion of economic resources to war purposes, and the sacrifices of normal economic satisfactions which made it possible. Some impression is given, too, of the effect of financial policy on various money flows, and of the influence of these money flows on normal expenditures on goods and services. But this part of the study is still incomplete. War needs had to be met in real terms rather than in money terms. How could financial policy encourage people to produce more goods and services than before, and yet induce them to take much smaller quantities of goods and services for their own use? Until consideration is given to the handling of problems of restraining costs and prices and of providing adequate production incentives, no study of financial policy can show how and why so much was produced and made available for war purposes. This is the function of the next three chapters.