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War Economy
The Memorandum of Security
The Memorandum of Security
For ease of accounting, the British Government agreed to pay the costs of the 2nd New Zealand Expeditionary Force as incurred and then to claim on the New Zealand Government. This arrangement was known as the ‘Memorandum of Security’, and was also used for other New Zealand overseas war commitments including, in particular, her contributions to the Empire Air Training Scheme.1
In discussing the Memorandum of Security, in the first wartime Budget statement in 1940, the Minister of Finance, the Rt. Hon. Walter Nash, said.:2
‘… arrangements have been made for the cost of New Zealand's forces overseas to be financed by the United Kingdom Government on a loan basis, New Zealand being charged the same rate of interest on such loans as the United Kingdom herself is paying in respect of her war loans. To the extent that this arrangement is utilised we will be piling up deadweight overseas debt that will be a heavy burden on us for many years after the war, when our ability to pay may be less than it is now. We have therefore every incentive to strain every nerve to meet from New Zealand the costs of maintaining our forces overseas as such costs accrue. In New Zealand these costs may be met by taxation or by borrowing. Even if it is necessary to finance by local borrowing, it is a debt we owe to ourselves and not a deadweight burden on the Dominion.’3
Under the Memorandum of Security the United Kingdom Government paid nearly £6 million in 1940–41 and over £8 million in 1941–42. The next two years added £35 million and, by March 1946, nearly £61 million had been paid by the United Kingdom Government on New Zealand's behalf.4
1 Under this scheme 131,000 trainees graduated in Canada, of whom 5·3 per cent were New Zealanders. New Zealand's share of the cost came close to £10 million.
2 Parliamentary Paper B-6, 1940, p. 3.
3 The important question of the availability of overseas funds to make the repayments to the United Kingdom Government is discussed in Chapter 14. (Author's footnote.)
In accordance with the policy set out by Mr Nash, progressive repayments were made. Nearly £1 ½ million was repaid in 1940–41 and a further £11 million in 1941–42, leaving less than £3 million owing at the end of March 1942. Substantial repayments were made in the following years, but New Zealand had some difficulty in keeping pace with the rate of expenditure and, by March 1945, nearly £19 million was outstanding. In 1945–46 a further £3 ½ million was debited, but, in this same year, repayment of the outstanding balance of £22 ½ million was made, clearing the account.
Repayment of this balance before the end of the 1945–46 financial year meant that the entire cost of the war to New Zealand had been met without adding to the country's indebtedness overseas. This was done without any pressure from the United Kingdom Government, but as part of the policy of the Labour Government in New Zealand to meet war costs from New Zealand, as far as possible.
The 1946 Budget statement, in discussing the repayment, said:1
‘The debt of £22,500,000 in New Zealand currency representing £18,000,000 sterling was the subject of negotiations in 1944, in conjunction with the lump sum payments totalling £28,000,000 sterling which the British Government agreed to pay.2 The arrangement then made was that a maximum of £18,000,000 sterling borrowed or to be borrowed under the Memorandum of Security would be held over for further discussion at the termination of the war.
‘The New Zealand Government, however, after taking into account all the relevant factors, decided that this debt should be liquidated forthwith.
‘We appreciate the facilities made available to us in this way by the United Kingdom Government, but have been happy to arrange for repayment in full of the debt so incurred.’
In the same year, the Government paid off £29·6 million of overseas debt, the necessary funds being raised by issuing stock in New Zealand. The stock was taken up mainly by the Reserve Bank. In presenting the 1946 Budget, Mr Nash said:3
1 Parliamentary Paper B-6, 1946, p. 15.
2 These lump sum payments were made up of £12 million ‘as compensation to meet the abnormal increase in prices of New Zealand imports from the United Kingdom from 1939 to the present’ and £16 million towards the cost of economic stabilisation in New Zealand, and in recognition of the fact that benefit accrued to the United Kingdom through New Zealand's economic stabilisation policy. (Author's footnote.)
3 p. 18.
‘The net saving in interest on this transaction is approximately £605,000, but the main benefit is the elimination of overseas interest totalling £1,330,000, which, coupled with the annual saving of £675,000 in connection with the Memorandum of Security repayment gives a net reduction in overseas debt charges of over £2,000,000 per annum.’
Thus, by March 1946, not only was there no outstanding overseas debt arising out of the war, but the overseas debt owing when war began had been reduced.