CHAPTER 3 — From Peace to War
From Peace to War
The First Few Days of War
NEW ZEALAND declared war just before midnight on 3 September 1939 and ‘in the early hours of Monday morning, 4 September, the Organisation for National Security and its associates had the strenuous, but rather satisfying, task of operating the newly finished War Book’.1
Already a state of emergency had been proclaimed on 1 September and the first group of emergency regulations had been made on 1 and 2 September. Included with the most urgent military and security powers were economic measures to prevent profiteering.2
A quick succession of regulations followed, giving the Government wide powers of economic control. Emphasis is placed in this volume on regulations of particular economic significance. A more general picture of the flush of emergency regulations is given by Professor F. L. W. Wood in a companion volume.3
Of the War Book and its use, Wood writes: ‘Under test the machine worked well. There were enough loose ends to provide a moral for the future: contingencies inadequately provided for on the one hand, and on the other, the inveterate tendency of Ministers and departments to work independently of one another and to appeal direct to cabinet, thus imperilling a hard-won co-ordination.’4
2 The Price Stabilisation Emergency Regulations 1939.
3 The New Zealand People at War: Political and External Affairs.
4 Ibid., p. 97.
It has been said that, ‘In its simplest and most abstract terms the general economic problem of war is one of securing the necessary supplies’.1 This applied with particular emphasis to New Zealand, where wartime disruption of shipping might easily accentuate supply difficulties. If there was to be a complete shipping blockage, as many people expected, the measures taken to safeguard existing stocks of vital materials would determine the number of weeks the economy could continue to function without a major disruption. Control of supply was, therefore, a very high priority, and on 4 September it received attention.2 Provision was made for Controllers, under a Minister of Supply, with wide powers to restrict or direct the movement of goods. On the same date oil fuel, one of the most vital commodities in war or peace, was rationed,3 while detailed supply arrangements were made for sugar, wheat and flour.
Powers over supply and use of materials were also to be given to other Controllers, whose primary interest was in production in specified groups of industries—a dual control of supply which was inevitably to lead at times to confusion and clashes.
New Zealand was to suffer wartime shortages which were in many cases aggravated by failure to make early or adequate provision before the war for the accumulation of vital reserves. On the other hand, in those cases where stocks had been built up, the relief provided by their judicious wartime use amply justified any pre-war sacrifices involved.
1 Elliott and Hall, The British Commonwealth at War, p. 257.
2 The Supply Control Emergency Regulations 1939.
3 The Oil Fuel Emergency Regulations 1939.
Controls over Production
It was correctly anticipated that, in war, New Zealand production would have an increasingly important part to play, both in supplying a larger proportion of New Zealand needs and in meeting the increasing demand of the United Kingdom for New Zealand food supplies. Moreover, government orders for war materials and war construction would require precedence over civilian needs. This precedence could not, without runaway inflation, be obtained by attempting to outbid civilian demand. More direct measures would be necessary.page 56
Sweeping powers to control manufacturing production were taken in the Factory Emergency Regulations 1939, and, on 12 September, overall control of building work was passed to a Building Controller.1 Three days later, provision was made for control of primary industries by a Primary Industries Controller.2
Thus, within two weeks of the outbreak of war, the Government had most of the administrative powers it needed to put production on to a war footing.
1 The Building Emergency Regulations 1939.
2 The Primary Industries Emergency Regulations 1939.
Recruitment of men for the armed services was, at this stage, voluntary. On 8 September plans were announced for a special force of men prepared to serve in any part of the world. ‘Recruiting for the first batch of 6600 men began on 12 September, and within a week almost 12,000 men had volunteered.’3
The only interference with voluntary enlistment was the use of the list of reserved occupations which had been compiled by the Manpower Committee before the war. This list was supplied to recruiting officers, with the intention that men engaged in these reserved occupations should not be accepted for the armed forces.
In the early stages, withdrawal of men for military service did not require other than voluntary measures of adjustment in civilian employment. Men could be replaced without too much difficulty. Unemployed persons were taken back into production, some less urgent work was cut out, and more overtime was worked. Women were used to an increasing extent in industry.
While unemployed labour and other unused resources were available, the need for extra output for war purposes could be met largely by drawing them into production. There was, as yet, no call for any serious sacrifice of civilian consumption to make extra resources available for war purposes, and no need for the Government to be too restrictive about the use of labour for civilian production.
The process of voluntary adjustments continued throughout the first two years of the war, but by the end of 1941 the cumulative withdrawal of some 30 per cent of the total male working population had exhausted unused labour reserves. It was becoming increasingly difficult to replace men recruited for the armed services or to divert further manpower and resources to war production.page 57
3 Wood, p. 98.
The Need for Co-ordination
The first flush of wartime regulations was made under the Public Safety Conservation Act 1932, which had been passed as a direct result of the Hawke's Bay earthquake in 1931. This act was not entirely adequate for a war emergency and the Emergency Regulations Act 1939 was passed on 14 September as a wartime measure to provide the authority for further regulations. This act, as amended, was to be the basis for a host of wartime regulations, and would then remain in force and be used long after the emergency which gave rise to it had passed.1
The regulations were intended primarily to give Controllers and Departments ample powers to act in the interests of the war effort. However, the more power individuals had the more difficult it became to prevent them from acting at cross purposes. It was soon apparent that a strong co-ordinating authority was needed.
To meet this need, a War Cabinet was proposed. There was considerable disagreement over the form it should take. In spite of the obvious need for better co-ordination of military and economic policies, questions of production, finance and manpower were to be excluded from the functions of the War Cabinet as it was originally envisaged.2 However, under pressure of considerable criticism, and no doubt moved by military disasters in France to seek more effective measures, the Government extended the scope of War Cabinet's functions. Peter Fraser,3 in July 1940, when he announced its formation, said that the scope of the War Cabinet ‘was not to be restricted to the services but it was also to make decisions concerning “production for war purposes, war finance requirements, emergency regulations so far as they apply to the war effort and generally to implement the policy of Parliament in relation to New Zealand's participation in the war”.’4
The War Cabinet included two members of the Opposition, Gordon Coates and Adam Hamilton, with Defence Minister Fred Jones, Finance Minister Walter Nash and Prime Minister Peter Fraser. It was to co-exist with Cabinet and with an advisory body, the War Council.5page 58
1 Amending regulations were still being made in 1956 (1956/137). It was still being re-enacted to protect existing regulations as late as 1959.
2 Wood, p. 140.
3 Savage died on 27 March 1940 and Fraser became Prime Minister.
4 Wood, p. 141.
5 The War Council was to include the Prime Minister and five other ministers, with nine members representing employers, workers, farmers, returned servicemen, and other groups. The Opposition did not accept an invitation to nominate three members.
Powers to Control Individuals
However strong the patriotism of the people, it would obviously have been impossible to meet the extensive wartime demands on the New Zealand economy without some degree of overall economic planning, leading to various forms of direct control. Wartime controls followed closely on the heels of the very definite pre-war statements of the Labour Government stressing its intention to conscript wealth before men. It is interesting to see whether this had any effect on the form they took.
Considering the Government's attitude to conscription, it was only to be expected that the early regulations would not contemplate direction of men or women. When the time for such action came, the Emergency Regulations Act of September 1939, though very sweeping in its powers, was not found powerful enough to enable the Government to conscript men. It was not until May 1940 that it was strengthened by the Emergency Regulations Amendment Act, which gave complete powers to control the individual as well as his property as ‘necessary or expedient’ for the war effort.
The Labour Party's opposition to conscription was deep-rooted and, even when this amending act was under discussion in Parliament, some members still hoped it would not be necessary to conscript men. But ultimately men were conscripted and wealth was not, except to the extent that much of the cost of war was met by taxation, and owners of productive resources could be required to undertake defence work.
Full control of manpower would involve the completion of a national register. The national register itself was seen as a possible threat to the freedom of the individual. The Government had refused to authorise it before the war and was still most reluctant to do so. Even when it became essential to have some form of register for specified age groups as they became eligible for conscription, the job was done piecemeal. Registration was, for the most part, restricted to those age groups which were immediately required.1
This rather halting approach to the problem was no doubt made workable by the fact that registration had been required for Social Security purposes since September 1938. The Social Security registration could be used as a check on those responding to wartime registration orders.2page 59
The powers necessary to impose conscription for the armed services were taken under the National Service Emergency Regulations in June 1940 and the first ballot was held in October 1940.
The same regulations made it possible for the Minister of National Service to direct any person over 16 years of age to perform any non-military service necessary for the war effort. However, this latter power was still not used, and it needed the outbreak of war with Japan, in December 1941, to enforce action on industrial mobilisation. Manpower direction into industry commenced in January 1942.1
There is no doubt whatever that the Labour Government had been very firm in its intention to conscript wealth before men, but in the circumstances as they emerged, such a policy would probably have been quite impossible to administer. Conscription of men was doggedly resisted, but ultimately was forced on the Government, partly because of the obvious unfairness of allowing men in New Zealand to please themselves whether they contributed to the war effort while large numbers of their fellow New Zealanders were engaged in actual fighting overseas, and partly because it became quite impossible, without conscription, to find sufficient men for the forces and for essential industries.
Failure to conscript wealth before conscripting men was probably a bitter disappointment to many Labour supporters. Some drew comfort from the measures the Government did take; for example, Mr James Roberts, President of the Labour Party, said at the Labour Party Conference in June 1940:2 ‘The only objection they3 ever had to conscription was when they were called upon to defend their country and the economic agency and the property of the country were not being utilized in the interests of the nation. In New Zealand the Government had now taken control of all property and it must be used in the interests of the country. The Government had given a pledge that no profits must be made out of the extra efforts of the people of New Zealand.’ The Government by no means took control of all property. Legally it did take intensive powers to direct the use of most productive resources. Some impression of the extent to which these powers were used, and of the possibilities of making high rates of profit from war contracts and other work, are discussed in following chapters, particularly in Chapter 13. The reader may prefer to suspend judgment as to whether wealth was conscripted until he has read Chapter 13.
1 Power was taken in an amendment to the National Service Emergency Regulations dated 13 January 1942.
2 Standard, 6 June 1940.
3 ‘The Labour and Socialist Movements of the world’.
There is no doubt that the Government considered the full implications of conscription of wealth before abandoning it. Conscription of wealth would, if carried as far as some of its advocates wanted, mean Government ownership, or at least control, of all the means of production. Wartime experience was to show that, in some industries, higher outputs could be obtained without Government ownership. Achievement of wartime production targets often involved using new methods and working under high pressure. Many state employees were capable, given the opportunity, of rising to such heights, but usually the detailed and rigid controls associated with state employment restricted them so much that they were unable to do so.1 The fact of the matter was that, where achievement of difficult targets was absolutely vital to the war effort, cost-plus arrangements and other systems of stimulating private enterprise, inequitable as they were, probably offered the only hope of success.2
Even presupposing that there was a strong body of opinion within the Labour Government in favour of ownership of the means of production, this was politically an extremely controversial issue and one which it was not desirable to fight out during the course of a major war. Later experience has shown the New Zealand Labour Party to be moderate in its intentions to nationalise the economy and quite willing to concede that, for a wide range of industrial undertakings, private enterprise can often get better results, given a reasonable measure of competition.
Keith Sinclair sums up very well when he says:
‘Slumps and wars alike have led to further centralization of power. The Second World War, as in many other countries, encouraged what was already the chief tendency of the Labour Government, and speeded the progress towards a “planned economy” via “price control” and “stabilization”. Broadcasting, internal airways, the linen flax industry, were added to the long list of state monopolies; but, in general, the Government contented itself with control over credit and marketing and made no attempt to nationalize production.’3
Though some changes to state ownership were made, private ownership and the profit motive remained predominant throughout the war, and in fact were given extra emphasis, in many cases, as the only means to get difficult and urgent assignments completed in time.
One of the strongest weapons to control the use of resources and the direction of expansion of industry was already available to the Government before war broke out, and could easily be used to encourage war industry or to discourage non-essential industry under war conditions. This was the system of quantitative controls over imports which had been introduced in 1938.
The Import Control Regulations 1938 were designed primarily to conserve overseas funds; but if imports were to be restricted, choices had to be made. For example, it was decided to make special provisions for imports of essential raw materials, so that the effort to reduce expenditure on overseas purchases would not adversely affect New Zealand industry. A special committee was set up within the Industries and Commerce Department to recommend to the Comptroller of Customs the action to be taken on applications for import licences relating to supplies of equipment and materials for New Zealand industry.
The committee was in a unique position to implement the Government's industrial policy, having as one of its aims the promotion of manufacture in New Zealand, where this would save overseas funds and where it was considered that the expansion of local industry could be carried out on an efficient basis. A general indication of the committee's functions as seen through Industries and Commerce eyes is given in the following extract:1
‘… In December, 1938, there were gazetted regulations providing for the control of importations into New Zealand. Apart from the question of limiting the importations of various commodities for general economic reasons, the operation of these regulations was intended to enable scientific selection of imports in order to provide for a balanced development and expansion of manufacturing industries in New Zealand. The system under the import-control policy provided for the making of application for import licences by manufacturers and general importers.
‘To ensure that manufacturers would be able to obtain adequate supplies of raw materials and new and additional forms of plant, machinery, and equipment, etc., the Industries Committee was constituted to examine and make recommendations regarding the applications lodged in respect of manufacturing industries in our Dominion, and to act generally in this regard in an advisory capacity to the Customs Department. The page 62 Industries Committee met representative groups covering over one hundred industries and divisions of industries, and the general scope for economic development and expansion in manufacturing industries was closely investigated. As a result of the Committee's efforts, considerable assistance has been given to enable manufacturers in New Zealand to increase the production required to meet the market demands for various commodities in respect of which the importations of finished products were reduced or prohibited.
‘In addition, proposals were examined for the establishment in New Zealand of manufacturing units representing large overseas manufacturers whose products were previously available to the public only through import channels. The prospects for the success of the policy have been very bright, and already a number of new industries have been established or are in the process of being established in New Zealand; and considerable expansion has occurred in industries already in existence in New Zealand. Apart from the development of their production in lines already manufactured here, they have in many cases engaged in the manufacture of new lines previously imported.’
After the outbreak of war and when the supply position deteriorated, some change in emphasis naturally occurred. When goods were available for the ordering, control over imports could be used as a means of developing industries making munitions and other war supplies and discouraging industries not regarded as essential to the war effort. But imports of many essential materials were soon restricted by their scarcity rather than by shortage of funds. The emphasis then changed to procurement at all costs rather than to an examination of the sterling position and its effects on ability to import. In the circumstances the initiative changed to some extent and the Commissioner of Supply, rather than the Comptroller of Customs or the Industries Committee, tended to make decisions on the importation of goods.
1 Parliamentary Paper H-44, Department of Industries and Commerce, Report for 1939, p. 20.
Influences on the Direction of Industrial Development
As early as 1936 an Industrial Efficiency Act had been passed to give the Government power to guide the development of industry. However, until quantitative controls over imports became effective in 1938, there was in fact little the Government could do to change the direction of industrial expansion. At this stage it became possible to influence the direction of expansion by keeping a tighter restriction on imports of materials used by industries whose expansion it was desired to discourage, and by making it page 63 easier to import materials used by industries it was desired to encourage. In the same way, development of a manufacturing industry could be encouraged by making it difficult to import finished goods of that industry but easy to import its raw materials. This sort of influence on the direction of expansion has always been associated to a greater or less degree with the use of import controls.
Under war conditions, emergency regulations gave powers to controllers to guide the rate and direction of expansion of manufacturing, and of primary production and building. There was also some selective protection of industries in the lists of reserved occupations which were issued to recruiting officers in the first weeks of war. The intention was that persons in essential industries should not be accepted for the armed forces.
In the early years of war this latter was a rather negative kind of control. Losses to the armed forces could often be made good if the industry was strong enough to compete on the labour market.
The powers given to industry controllers were seldom used to apply controls directly to the production targets of firms, and it was supply which soon became the controlling influence for nonessential industries. This type of control intensified as shipping difficulties and the diversion of overseas production to the making of war equipment led to serious shortages of materials. As supplies became inadequate to meet the demands of essential industries, complete restrictions were placed on the use of materials for some specified purposes. Controls over the use of building materials in particular became very stringent, and severely restricted private construction or even maintenance work.
Controls over supply remained the only really effective means of influencing the rate and direction of growth of industry until the time came for the Government to take power to direct industrial labour. At that stage, control over manpower gave another powerful influence over production.
These types of influence were not always sufficient to free resources for essential works. The Government itself tended to face supply and labour difficulties. To get certain Government work done for war purposes it was necessary to divert considerable resources from other uses. This could be done either by taking direct controls sufficient to forbid the use of resources for certain purposes, or by offering a higher reward for the use of resources than could be paid by non-essential users. This latter process tended page 64 to be inflationary, but we find it used, along with direct restrictions on the non-essential use of resources. It was not sufficient just to free resources for essential uses. Adequate incentives were also necessary if war production was to meet difficult targets.1
1 Not to mention the need for a supporting fiscal and monetary policy.
Rationing of Consumption Goods
There was very little rationing of consumption goods in the first two years of war. Motorists' supplies were an exception. Petrol was rationed from the outbreak of war. After a brief period of confusion in which some people tried to circumvent the rationing and lay in reserve supplies, coupons were issued to petrol users a fortnight after the outbreak of war. The distribution of rubber tyres was controlled from December 1941, most going to essential users.
‘People who have been buying groceries well in excess of their normal requirements have led city grocers to adopt restrictions. In future they will sell only four pounds of sugar, one pound of tea, seven pounds of flour at a time. To avoid multiple purchases at different shops, many stores will serve only their regular customers. To counter requests for twenty-five pound or fifty pound bags of flour, they will in future buy 200 pound sacks and pre-packet in seven pound containers.
‘A city grocer told a reporter this morning that his business this week had been about double the normal. The main requirements by some customers was sugar, tea and flour, and big orders were being put in for tinned fish and fruit. Shop attendants who attempted to restrain customers were bullied into accepting orders, he declared. He pointed out that hoarding was both unnecessary and unfair to other customers who bought normally and the trade was forced to make restrictions.’
The grocers' reaction was sufficient to save the day at this stage. Most people behaved sensibly, though there were some cases of hoarding of a few non-perishable lines. As various groceries became short, many retailers went to the trouble to distribute them as fairly as possible and the need for ration coupons was postponed until 1942.page 65
2 Sugar was the first item to be rationed, on 27 April 1942.
Arrangements by the United Kingdom to buy New Zealand farm produce in bulk and wartime plans for more orderly marketing of scarce commodities in New Zealand were facilitated by the existence at the outbreak of war of an experienced Marketing Department.
The introduction of the guaranteed price for dairy products would not have been feasible without controlled marketing arrangements. The Government had decided to achieve this by itself entering into the field of marketing, and accordingly the Primary Products Marketing Act 1936 had made provision for the Government to buy in these products at fixed prices and to control their sale and distribution. The Primary Products Marketing Department was set up for this purpose.
The Act gave power to the Department to market any primary product, but in the early years its function was limited to the control of marketing of dairy produce so that the guaranteed price scheme could be put into effect.
Within a few days of the outbreak of war, agreement was reached on the arrangements, which had already been discussed, for the United Kingdom Government to purchase New Zealand's exportable surplus of meat, wool, butter and cheese. A special New Zealand purchasing agency was needed and the Marketing Amendment Act 19391 provided the necessary machinery for the Department to deal with meat and wool and other products on similar lines to those already in operation for dairy produce. The Act changed the Department's name to the Marketing Department, and its functions were extended so that it could deal with any specified goods instead of with primary products only.
No bulk purchase arrangement was made for fruits. The United Kingdom Government regarded these as comparatively low priority food items, which could be done without when shipping was scarce. It became apparent that war conditions would probably lead to the loss of most of the overseas market for apples and pears. In the circumstances the New Zealand Government undertook to purchase the entire crop of graded fruit for the 1939–40 season at agreed prices. As anticipated, available shipping space had to be conserved for more essential commodities and very little fruit could be sent overseas.
1 Issued 7 October 1939.
There was a short postponement of the full impact of the United Kingdom's decision in the first wartime season and, in 1940, rather more than half the normal quantity of fruit was exported. However, from 1941 to 1945 less than one per cent of normal exports could be sent. The disposal of crops of apples and pears within New Zealand became a major internal marketing undertaking.1
Chart 11 gives an impression of the effect of the United Kingdom Government's decision to treat fruits as a low priority food item.
Just as the bulk purchasing arrangements with the United Kingdom were dealt with by an organisation already experienced in handling dairy produce, so too experience was not lacking in internal marketing.
2 The Primary Products Marketing Amendment Act 1937.
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.page 68
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.
Geared for War Production
All these changes took place with remarkably little friction. A recent writer said:1
‘The smooth change-over from peace to war was assisted by the import and export, marketing, and banking controls that the government had introduced already, and also by the fact that the government had a large works agency and owned or controlled much of the internal transport and communications system. Existing procedures served as a framework on which to build a more comprehensive regulatory system, much of which had been planned by the Organisation for National Service.2 A Minister of Supply, assisted by a small group of officials and a network of committees, investigated what should be done to stimulate and direct industry, and kept a continuous watch over supply and production. The government appointed ten controllers to regulate key commodities and services—sugar, wheat and page 69 flour, oil fuel, factories, timber, building, electricity, food, medical supplies, and mining. These men were public servants and worked under the general control of Ministers. A new National Service Department undertook the complex work of directing and controlling manpower as the country introduced compulsory military service, and geared itself to war production.’
It should perhaps be added that the switch to a war economy was assisted by the willingness of most New Zealanders, under stress, to give extra effort and make sacrifices, and by the fact that the Public Service was at its soundest after a quarter of a century of good recruitment, much of it by competitive entry.
1 Polaschek in Government Administration in New Zealand, p. 47.