Difficulties Before the War
Difficulties Before the War
IN the years just before the war, the New Zealand economy had shown a disconcerting propensity to import more goods than could be paid for out of current overseas exchange earnings. This tendency was to be repeated and to become more marked after the war.
The situation was aggravated by the fact that, because of the nature of New Zealand's overseas exchange transactions, she has never been able to maintain a healthy balance of payments position merely by exporting sufficient to pay for her imports. Unless there is to be overseas borrowing, exports must earn enough to pay also for interest on debt owed overseas, expenditure by New Zealand tourists abroad, and a number of other items of this sort, known as invisibles, where New Zealand's commitments considerably exceed what she receives on a similar account from other countries. The net annual cost of these invisible items was approaching £10 million at the outbreak of war. These amounts were an annual charge on export earnings which then averaged about £60 million a year.
In the years 1933 to 1937 there had been comparatively little change in volume of exports; 1936 and 1937 were record years but were still only a little above 1933. However, prices were rising in 1936 and 1937. As a result of the improved prices, the value of exports in 1937 was 63 per cent above 1933.
Imports had risen to keep pace with export earnings, but were reluctant to fall when export earnings decreased. When, in 1938, the volume and price of exports both fell, causing a drop of over £8 million in earnings, imports were reduced by less than £1 million.
Export prices declined up to late in 1938 and, with continued page 367 high importing, there remained insufficient export earnings to cover other payments. The overseas assets of the banking system fell by over £20 million in the two years 1937 and 1938, to be under £7 million in December 1938. This was a drastically low level.
Import control regulations to conserve overseas funds became effective from December 1938. They were to remain in force throughout the war and into the post-war period. The regulations prohibited the import of goods except where a licence had been issued or an exemption granted by the Minister of Customs. Export licences were required also, and were issued on the condition that overseas funds or credits from the sale of goods be sold to a New Zealand bank. Imports fell by £6 million in 1939.
With no recovery in export earnings, the 1939 reduction in importing was hardly sufficient. The position was made even more difficult by overseas loans falling due in January 1940, and by the need of the Government to stockpile strategic materials in preparation for a possible war.
The situation looked desperate, and the London money market, which was critical of the Government's financial policy, was unsympathetic. A Financial Times leader, dealing with Mr Nash's fund-raising mission to London, stated:1
‘In view of the difficult external debt problem of New Zealand, the arrival of Mr Nash is greatly welcomed. The real problem of the Dominion's credit is that behind the exchange situation lies a record of expensive social reform, public works, and guaranteed prices for dairy produce.
‘The first essential should be a slowing down of expenditure on social and economic reform in order to give the maximum effect to the present import control, but Mr Nash is apparently convinced that import control alone will be sufficient.’
Nevertheless Mr Nash, in July 1939, succeeded in negotiating the conversion of loans of over £17 million sterling which would otherwise have fallen due for payment on 1 January 1940. To get this much-needed relief, he was forced to agree to conditions which would have been unacceptable in less straitened circumstances.
The 1940 Official Yearbook2 includes, as part of the terms of issue of £16 million of the replacement stock:
2 p. 602.
This stringent repayment provision was new to New Zealand.
‘Our position generally has been eased and more time for necessary economic adjustments secured as a result of Mr Nash's successful negotiations in London, and I would like to take this opportunity on behalf of the Dominion of thanking the Imperial Government for the help they have given us. As honourable members are aware, this help takes the form of £5,000,000 sterling of export credits at 4 ½ per cent interest with a currency of five years for Government imports from the United Kingdom and £4,000,000 sterling of short term credits for commercial purposes. Both classes of credits are available for the purchase of British goods. Government imports at present are being swelled by material for our defence forces, and a considerable portion of the credit granted for Government purposes will be utilized for this purpose.’
1 Financial Statement, Parliamentary Paper B–6, p. 2. Mr Savage was Prime Minister and acting Minister of Finance.