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War Economy

Suppressed Inflation

Suppressed Inflation

New Zealand, wrote Condliffe, ‘emerged from the war taut with suppressed inflation.’1

Incomes as well as savings were high, and shortages of raw materials and of finished goods were to continue for some years after the war. New Zealand, with its labour force already fully employed, was likely to have more difficulty than some countries in overtaking demand.

The policy of stabilisation was continued after the war and, indeed, many people saw its restraining influence then as even more necessary than during the war. In February 1946 a Wellington daily reported:2

‘Emphasising that the stabilisation fight did not end with the war and that the danger of inflation was now greater than ever, the Minister of Industries and Commerce, Mr Sullivan, said in an address last evening that New Zealand was now in the second period for which stabilisation was designed, and that to abandon those controls now would be inviting disaster. Experience had shown that the period just after a war was the time of greatest danger from inflation, and the time when the greatest effort was called for to protect the economic security of the country. The Government had always made it clear that, while its stabilisation policy was vital to the New Zealand economy during the war, nevertheless it would be a necessary cornerstone of economic policy during the immediate post-war years, said Mr Sullivan. The problem was insufficient goods with Plenty of eagerness to buy, and if there were no stabilisation controls the prices of everything might rise to fantastic levels. To prevent that inflationary boom right now was the purpose of stabilisation. Price controls during the war kept inflation from getting into its stride and affecting the most important everyday commodities, and they must be maintained if the people were not to have skyrocketing prices.’

Mr F. P. Walsh of the Federation of Labour went further, and pointed to the need for extra production to supplement the stabilisation scheme:3

1 J. B. Condliffe, op. cit., p. 99.

2 Evening Post, 18 February 1946.

3 As reported in the Evening Post of 6 March 1946.

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‘He recalled the disastrous effects of the inflation which followed World War I, and said that there were dangerous elements in the present situation of New Zealand's economy. So far, thanks to the policy of economic stabilisation, which met with the official and active support of the Federation of Labour, we had come through the war well, and relatively to other countries we had achieved a great measure of success.

‘“But”, Mr Walsh continued, “we must not lose sight of the fact that the forces that brought about the chaotic conditions of boom and slump after the last war are present in the New Zealand economy today.

‘“… The only solution to our problem is increased production. I must stress again the point that, if we are to have higher standards of living, we must have more goods and services. Our movement is no longer just fighting for wages. We want to increase actual standards of living. To do this, we must increase production. Real standards come from production, not from the printing of a note issue.”’

In war, savings had played a most important part in reducing the civilian demand for scarce goods and services. Now the risk was that this pent-up demand might be released too soon, before the flow of civilian goods and services was sufficiently increased. The considerable accumulated savings of civilians from the war period were swelled by the gratuities which had been credited to returned servicemen, and were in many cases held in savings accounts. The consumer durables on which many of these savings might have been spent were not yet available in adequate quantities, and the risk that savings would be extensively used on the normal consumer market was an ever-present threat to price stability.

Williams wrote:1

‘The importance of savings held in monetary form as a source of inflation, is somewhat difficult to assess. Spending of savings has been kept in check by absolute shortages of materials. There is, for example a large demand for houses which cannot be supplied fast enough to meet the shortage. Controls of prices, rent, land sales, and materials prevent the price of old and new houses from being forced up, and the accumulated savings are held back. The same applies to such imports as automobiles. How long this situation will persist depends on how long people are willing to wait for goods now in short supply.’

1 J. W. Williams, op. cit., p. 89. Written in 1948.

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Actually savings proved to be a potential, rather than an actual, threat to stability. There was no sudden depletion of savings accounts; in fact, since the war, the sums in small savings accounts1 have increased every year.

The more immediate threats were the high level of incomes and the expansion of bank credit, coupled with accumulated shortages of consumer durables and capital equipment. The question was whether the conversion of the economy back to civilian production would be fast enough to cope in a reasonable time with the shortages and with the rate of expansion of demand.

Until 1947 the prices of essential goods and services were stabilised fairly rigidly, a policy which required increasing use of subsidies. The net cost of subsidies increased threefold, from £4.6 million in 1944–45 to £13.6 million in 1947–48.

However, in 1947, a number of farm subsidies were removed and, in compensation, price increases were allowed on farm products. Some of the less important subsidies on other items were removed at the same time, and certain other subsidy rates were reduced, with resulting price increases in sugar and many other commodities. The retail prices index rose 10 per cent between the fourth quarter of 1946 and the fourth quarter of 1947, but not all of the increase was due to subsidy changes.

Apart from modifications of this sort, the general stabilisation of prices was continued, but, in November 1948, most fruits and vegetables were released from price control, and in January 1949 meat prices were freed from control for part of each year.

The Government took advantage of the buoyant state of the economy to announce the return of the currency to parity with sterling in August 1948.2 Condliffe wrote,3 ‘This appreciation was timely and well executed but did not do more than damp down for a brief spell inflationary pressures in the economy.’

Meantime, the supply position for a number of commodities was improving. Petrol rationing by coupons was dropped in June 1946 but, after a period when oil companies were given the responsibility of making as equitable as possible a distribution, rationing had to be re-introduced in 1948. Clothing rationing was abolished in 1947, and tea, sugar, and meat rationing in 1948. Butter rationing ceased in 1950 and petrol rationing was finally abolished in the same year.

1 In Post Office Savings Bank Accounts, Trustee Savings Bank Accounts, and National Savings.

2 The currency had been depreciated to £125 NZ = £100 sterling in 1933.

3 J. B. Condliffe, op. cit., p. 100.

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In February 1949 the Court of Arbitration was given its first set of peacetime instructions to be taken into account in fixing award wages. New items it was specifically required to take into account were retail prices, economic conditions, and relative movements in incomes of different sections of the community. Several pronouncements or orders were made, and award wages, up to 1955, tended to increase faster than prices.

The remnants of the wartime economic stabilisation policy were abandoned by the National Government, after it came into office in December 1949. In 1950 there were reductions in the subsidies on flour, bread, milk, butter, and eggs. Those on coal and tea were removed. Retail prices rose 6.6 per cent between the first and third quarters of 1950, over 3 per cent of the increase being attributable to the subsidy changes.

Attempts were made to remove price controls progressively as supplies of goods and services improved. This policy received a setback for a time from the end of 1950, when the heightening of international tension caused new shortages and raised the prices of some goods.

In 1951 the Government decided to hold the prices of butter, milk, bread, and flour at their existing levels, a policy which was to require the increasing use of subsidies on these items. At this stage two-thirds of consumer purchases were price-controlled.1

1 The New Zealand Economy 1939 to 1951. Parliamentary Paper B–5, 1951, p. 33. Based on items in the Consumers' Price Index. For all consumer purchases the proportion controlled was probably a little smaller.