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War Economy

Financial Controls—Stabilisation

Financial Controls—Stabilisation

Behind all these controls, and in many ways more important than any of them, was the overall control of finance. The change from peace to war more than quadrupled annual Government expenditure in the five years from 1938–39 to 1943–44. It was characteristic of war that, if goods and services were ordered, their delivery had to be quick and certain. The urgency and size of war needs, and the massive diversion of productive resources they required, tended, unless there was a comprehensive and balanced financial policy, to generate rapid rises in prices, costs and incomes.

To find money to finance the war was only the first objective of financial policy. It had also to prevent inflation from curtailing the purchasing power of war expenditures. To this end, and to reduce fierceness of competition between defence and private orders for scarce resources, it had to take purchasing power away from the private sector of the economy. Consistent with all this, it had to leave the private sector with adequate incentives to provide increases in production from its depleted resources. For increases in production were essential, if there was to be a sufficient volume of supplies available to meet war needs in addition to such normal requirements as could not be postponed.

In short, financial policy had to make war expenditures possible, to reduce the pressure of competing expenditures and to avoid inflation, but must still not interfere with incentives to provide maximum production. It would have been difficult enough to do all these things at once had revenue collection in war not needed to be on such an unprecedented scale.

Direct controls were often necessary to ensure that the war effort was most effectively directed. They would have been inadequate to divert resources on the necessary scale had financial policy failed in any of its major objectives. Price control and stabilisation generally had to be much more than a means of protecting the purchasing power of the people. They were to become cogs in an overall financial policy aimed at providing the climate for maximum production and maintaining the effectiveness of war expenditure in its command over goods and services.

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The Government, by the Reserve Bank Amendment Act 1936, already had a substantial measure of control over the Reserve Bank, while the Price Investigation Tribunal provided an institutional structure for price control. Government controls and influences over financial transactions were to become very widespread indeed, as had to be the case if the Government was to succeed in its intention of financing an extensive war effort primarily from internal sources.

In the early war years, the fact that there was unemployment at the outbreak of war to some extent countered the inflationary effect of wartime spending. Extra expenditure tended to be absorbed and the extra need for resources met by drawing in unemployed labour. Until this pool of unused labour was largely removed, there was no immediate danger of runaway inflation.

However, financial strains soon started to appear, and in the ultimate, when it became too difficult to hold wages and prices, the Government resorted to a comprehensive stabilisation programme, in December 1942, with an Economic Stabilisation Commission examining almost every economic proposal to determine whether it was likely to interfere with the programme. The Government's measures, which held a surprising degree of financial stability throughout the war, in spite of excessive physical strains on the economy, must rank among the most successful of its wartime policies.