Title: War Economy

Author: Baker, J. V. T.

Publication details: Historical Publications Branch, 1965, Wellington

Part of: The Official History of New Zealand in the Second World War 1939–1945

This text is the subject of: ‘Something of Them Is Here Recorded’: Official History in New Zealand

Conditions of use

Full Employment

In the later war years, the conviction grew that a country which could achieve full employment of its labour force in war should be able to find a way of continuing full employment in peace. This conviction was not born of the idea that full employment would be easy to maintain, but of a determination that, however much effort it involved, economists and politicians must find a way to adjust the peacetime economy so that it would, in the interests of the people's welfare, do what it had obviously been able to do in the interests of war.

This feeling is summed up in a paragraph of a July 1944 report by the Organisation for National Development:¹

Again, in May 1945, the Director, Mr J. S. Hunter, wrote:¹

‘The most important single problem to be faced after the war is the maintenance of full and efficient employment of the Dominion's labour force.’

These were widely held views in the last year of war. Yet, when full employment persisted after the war, there was no lack of people to suggest that this outcome had been obvious.

The inflationary influences in the economy at the end of the war have often been offered as a sufficient reason for post-war full-employment. Williams, for example, wrote:²

‘Since the war, the demand for both consumers' and producers' goods has been much greater than that which industry has been able to satisfy at current prices. The consumers have large monetary resources and are willing to spend them. The result has been a very high level of employment without any action by the state other than the provision of labour exchange services.’

Again Weststrate, writing later, said:³

‘As the inflationary situation inherited from the war was obviously not created for the purpose of maintaining full employment, full employment was, in the immediate post-war years, just a by-product of the war. This applies also to other countries. In most of these inflation was halted around 1950. In New Zealand inflation went on. As it was the Government's professed intention to halt it, one cannot believe that it was consciously applied as a means of maintaining full employment. If full employment was not the intentional effect of inflation, it was an unintentional effect, a by-product.’

Weststrate was not content with this explanation alone. He teamed it with another cause, stickiness of wage rates. He went on to say:⁴

‘Overfull employment is usually the effect of inflation plus “stickiness” of wage rates. The active cause is inflation; stickiness of wage rates is a condition that has to be fulfilled if inflation is to lead to overfull employment.’

However, these explanations were not enough. Inflation and lagging wage rates had been experienced in many other countries, and, on previous occasions, in New Zealand. They had usually led to rapid price rises, over-importing, and other evils, rather than to full employment.

Price rises, if inflation did not get completely out of hand, could be restrained by price control, and, to the extent that this control was really effective, high money demand would be persistent in its pressure on production, employment and importing. Price control was comprehensive in the immediate post-war years, but, even after considerable decontrol in the early 1950s, full employment was to continue.

In any event, it is likely that backlogs of capital goods and consumer durables, and the productive effort to replace them, would have kept employment at high levels in the early post-war years; but the scarcity of labour lasted much longer than did the accumulated shortages of these types of goods.

It is impossible to say how long inflation and full employment would have continued in the 1950s and 1960s if they had not been encouraged by other influences which were not really war effects at all.

For a start, two important new government influences were at work in the post-war economy, both of them to a degree inflationary in their effects,¹ but both having a range of other effects on the economic structure and its functioning. There was now a far-reaching social security scheme; and import controls, first used in 1938, were continued after the war.

Introduced and maintained as a measure to preserve overseas exchange, import controls were, in practice, used extensively as a shelter for the expansion of manufacturing industries. Even had this not been so, their presence ensured that a large proportion of the high level of incomes was channelled into demand for local production; and so helped to encourage expansion of output and employment. To the extent that local producers could not cope with the extra demand, it also tended to raise the internal price level.