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War Economy

CHAPTER 4 — The Demands of War

page 70

The Demands of War

Men for the Armed Forces 1

OF all the impacts of war on the New Zealand economy, probably the most momentous was the withdrawal of men and women from industry for the armed forces. At peak mobilisation, in September 1942, over half of all New Zealand males in the age group from 18 to 45 were in uniform. This peak recruitment lasted for a comparatively short period, but a high level of manpower participation characterised New Zealand war's effort. For some two and a half years, from early 1942 to the second half of 1944, one third or more of the 18 to 45 age group was serving.

The effect on the civilian labour force was drastic. For over five years, from the second half of 1940 right through to late 1945, at least one in ten of the male labour force was in the armed forces. The most difficult period was from early 1942 until late 1943, when over a quarter of all males available for work were serving. At the peak of recruitment, in September 1942, the proportion in the forces reached 30 per cent of the male labour force.

Virtually all these men would have been available for work in New Zealand industries had they not joined the forces.2 Industry had thus, for a period, to release well over a quarter of its labour to the armed forces. Even with production curtailed in many non-essential industries, this was a staggering demand. It might well have proved insuperable had it not been possible to draw into industry considerable numbers of married women, older people and others who would not normally have formed part of the labour page 71 force, together with most of the initial pool of unemployed. There was still a drastic reduction of labour in industry, and the struggle to meet increasing demands for production with a dwindling labour force placed a considerable strain on many industries.

Chart 12 shows changes in the proportion of the male labour force who were in the armed forces.

chart of labour force demographics

Chart 12

1 Armed forces strengths given here are taken from Parliamentary Paper H–11a, Report of the National Service Department, 1946, p. 122. They differ from those given in H–19b, Statement of Strengths and Losses in the Armed Services and Mercantile Marine in the 1939–45 War (1948). The latter figures exclude troops in transit, prisoners of war, etc., but include part-time Territorials.

2 As would a large proportion of the women who joined the forces.

Overseas Service

Early in 1941 some thirty thousand New Zealanders were serving overseas. By the middle of the year there were forty thousand, and this number was to be considerably exceeded for the rest of the war. Pearl Harbour, in December 1941, renewed the danger of Japanese invasion and led to a rapid strengthening of the home army; but still the numbers serving overseas continued to increase.

At the peak of recruitment New Zealand had 50,000 men and women serving overseas and well over 100,000 serving in New Zealand. This was in September 1942, but it was not until November 1943 that the highest point was reached for men and women serving outside New Zealand. There were then 70,000 serving overseas and nearly 66,000 in New Zealand.

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Wherever they were serving, men in the armed forces had to be fed, clothed, equipped and sheltered, while their services were withheld from their usual contribution to production. But the financial effects differed. The men serving in New Zealand added the financial impact of their pay to the demands on the New Zealand economy in the same way as if they had been producing. This expenditure, without any accompanying production reaching the market, aggravated the tendency to an excess of money demand for goods and services.

Chart 13 shows relationships between New Zealand's overseas and home forces over the war years.

chart of army statistics

Chart 13

To the extent that those serving overseas allotted portions of their pay to dependants in New Zealand they, also, added to the potential money demand on the New Zealand market. However, the more significant financial impact of overseas service was the expenditure of overseas funds which had to be found to equip, pay and maintain the forces. Unless this extra expenditure was to be matched by overseas borrowing, funds had to come out of export earnings at a time when shortages of overseas funds had page 73 already led to restrictions on imports. As we have seen,1 the Labour Government had decided against raising money for war by overseas borrowing. New Zealand would pay for the war as it went along. In so far as the war led to overseas payments, this meant, in the main, that New Zealanders would do without a corresponding quantum of imported goods.

black and white photograph of New Zealand farm

high-country sheep farming
A typical scene at mustering time on a Canterbury station

black and white photograph of milking cows

modern dairy farming methods
New Zealand has been among the world leaders in the development

black and white photograph of road work

state housing
Road planning on a pre-war state housing scheme at Wellington

black and white photograph of road works

heavy earthmoving equipment, pre-war
Construction of the Ngahauranga Gorge road in 1938-39

black and white photograph of air field construction

pre-war defence construction
Plant assembled for levelling work at RNZAF Station, Whenuapai, January 1939

black and white photograph of enlisting recruits

manpower for the services
Enlisting for the First Echelon, 2 NZEF, at Wellington. Within three weeks of the declaration of war nearly 12,000 men had volunteered

black and white photograph of construction workers

mobilisation camps
Construction work at Trentham in the early weeks of war. Mobilisation camps were completed in record time

black and white photograph of troop ship

overseas service

1 p. 21. There is also a fuller discussion in Chapter 10.

Women for the Armed Forces

Recruitment of women for the armed forces did not reach substantial numbers until August 1941, when six hundred women were serving. The numbers then gradually increased until a peak figure of 8700 was reached in August 1943. Thereafter women were gradually released, but in November 1945 three and a half thousand women were still serving.

Participation of women in the services released men for more active armed service, just as the entry of women into industry released men for tougher industrial assignments and for the armed forces. In the main, those women whose home ties were light enough to permit them to participate actively in the war effort did so by voluntarily replacing men in paid jobs which had been depleted of labour by recruitment for the forces.

United States Forces in New Zealand

With the war in the Pacific came the garrisoning in New Zealand of United States forces and the need to build camps and hospitals for them. In June 1942, 17,000 men arrived and there were to be substantial numbers in New Zealand from then until July 1944. Construction work for these allied forces was undertaken by the New Zealand Government using New Zealand labour. The work was an offset to American Lend-Lease supplies reaching New Zealand, but there was nothing to relieve the strain it placed on manpower. Moreover, the United States authorities in New Zealand, in need of men to load and unload vessels, to maintain camps and provide transport and a variety of other services, entered into competition for the already scarce labour supply. United States servicemen on liberty added to the demand for the limited supply of goods and services. With adequate funds and high rates of pay, the visitors were at a considerable advantage. New Zealand page 74 employers and New Zealand consumers found themselves unable to compete. The extra injection of freely available money added to the Government's stabilisation problems, but, from the point of view of the balance of payments, there was considerable advantage to New Zealand in the inflow of foreign exchange to enable United States servicemen to be paid.

In the second half of 1942 there were usually from fifteen to twenty thousand United States servicemen stationed in New Zealand. Then, in the first quarter of 1943 the numbers were built up to over forty thousand, where they remained until a peak of 48,200 was reached in July 1943. There was a substantial reduction in August, but it was November 1943 before the numbers fell below thirty thousand.

Chart 14 shows changes in numbers of United States servicemen in New Zealand.

chart of US troop statistics

Chart 14

page 75

From the military viewpoint, the presence of United States forces on this scale in New Zealand was of strategic significance, and must have reduced considerably the risk of Japanese attack. Indeed it is surprising that New Zealand's own armed forces serving at home continued to outnumber those serving overseas until as late as September 1943.1

From the economic viewpoint, the presence of United States as well as New Zealand armed forces in New Zealand meant so many more persons who made demands on consumer goods and services available in New Zealand without assisting in their production.

Chart 15 shows the numbers of servicemen in New Zealand, including those of both countries.

chart of US troop statistics

Chart 15

page 76

1 See also Chart 13.

Finance: Two and a half Years of National Income Diverted to War Purposes 1

With up to 30 per cent of the labour force serving in the forces, it was inevitable that the financial cost of war to New Zealand would take a very high proportion of available funds. In fact, expenditure on the Navy, Army and Air Force reached nearly 12 per cent of the national income in 1940–41, rising to 19 per cent in 1941–42, and to nearly 42 per cent in 1942–43. With all costs incidental to the conduct of war included, as measured by expenditure through the War Expenses Account, the proportion of the national income going to war purposes reached 50 per cent for each of the years 1942–43 and 1943–44.

Chart 16 shows the costs of war expressed as percentages of national income.

chart of expenditure statistics

Chart 16

1 The War Expenses Account as a measure of the cost of war is examined more fully in Chapter 10. Comparison against National Income gives the best indication of the burden of the cost of war. When considering diversion of resources, comparison against Gross National Product is better, as is done in Chapter 10. Note, however, that pay and allowances of special wartime forces were included in National Income, but were not liable for taxes on income.

page 77

The full costs of war over the six years 1939–40 to 1945–46 have been estimated at close to £700 million, which was equivalent to the entire national income for two and a half years, diverted to war purposes.

War expenditure on this scale was naturally not possible without very drastic curtailment of other expenditure, both for consumption and for capital formation. Even allowing for wartime restraints on other types of expenditure, the pressure on available resources was to make it most difficult to maintain reasonable stability or balance in the economy. It was fortunate that the Government was able to win a measure of support from all sections of the community for its stabilisation policy; otherwise, wartime financial pressures on a consumer market depleted of goods and on a labour market depleted of manpower would have led to rapid inflation.

Part of the costs of war had to be met in foreign exchange. Nearly £61 million was paid overseas to meet the costs of the 2nd New Zealand Expeditionary Force. This was a drain on New Zealand's overseas exchange earnings, taking foreign exchange which would otherwise have been available to pay for imports.1 The cost was equivalent to the value of about one full year's imports at that time.

Under Reverse Lend-Lease, New Zealand supplied the United States with goods and services which, for accounting purposes, have been set down at £82 million. A similar quantity2 of goods and services for war purposes was received from the United States under Lend-Lease. Nevertheless the sacrifice for New Zealand was high. All these transactions were concerned with the war effort and a very considerable proportion of the £82 million supplied by New Zealand, and, in effect, exchanged for war supplies, was in the form of goods which would have been available to earn foreign exchange had it not been for the war. In fact, the largescale diversion of foreign-exchange-earning exports to become non-earning supplies to allies in the Pacific was to cause considerable alarm in 1942 and later, when it was feared that New Zealand would be left with quite inadequate funds to pay for needed imports.3

The overall requirements of foreign exchange to meet war commitments probably reached close to £150 million,4 equivalent to New Zealand's export earnings for about two years. Because of

1 Often in the war years it was supply shortages rather than funds shortages which restricted imports.

2 The value for accounting purposes was set higher, but New Zealand kept a tighter control over costs and prices.

3 See also Chapter 10.

4 Only a rough approximation can be made. Information on overseas exchange transactions for the war years is quite inadequate. See also Chapter 14.

page 78 the comparatively fixed nature of export earnings, this external impact was just as great a strain on the New Zealand economy as was the much larger sum of money used for war purposes in New Zealand. Without restriction of private imports, for which machinery had already been provided in 1938, aided by the fact that many of the goods New Zealanders would have liked to import were not available at the time, it might well have proved impossible to find overseas funds to meet so large a commitment. As it turned out, overseas assets, which had been dangerously low in 1930, were to reach quite a healthy level in the later war years.1

1 See also Chapter 14.

Demands on New Zealand Farming

Supply is vital in war, and it is no reflection on New Zealand fighting men to say that New Zealand's function of providing food for her allies was possibly just as important to the ultimate course of the war as her contribution to the actual fighting. War demanded an outstanding effort in both directions.

Throughout the war there was considerable pressure on New Zealand farming to produce more and more food and to supply it to an increasing range of users. United Kingdom needs increased as alternative sources of supply were successively shut off, and with the increasing Allied initiative in the Pacific from the second half of 1942 came the need to supply food to forces operating in this theatre of war. Foodstuffs to the value of £38 million, equivalent to a full year's supply to the United Kingdom, were diverted to the Pacific.

To some extent any food supplied to United States forces in the Pacific represented a sacrifice by the people of the United Kingdom, whose food was already in short supply. But with increasing mechanisation of New Zealand farms it was possible to provide large quantities of food for the United States forces without serious depletion of supplies to the United Kingdom. The output of farm produce was stepped up by farmers whose numerical strength had suffered considerably by losses to the armed forces; this in spite of the fact that there were shortages of fertilisers and of some types of equipment for farming.

A contribution to the continuance of supplies to the United Kingdom, while exceptional demands for food for forces in the Pacific were being met, was made by the New Zealand consumer, whose consumption of farm products was rationed from 1943.2 In this and many other ways the demands of war made a direct impact on the New Zealand consumer.

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Not only was an increased output expected of the New Zealand farmer but he was required to make quite drastic switches in his production to meet the changing demands of the United Kingdom, as other sources of supply were cut off or became available. Twice there was a substantial change in emphasis between butter and cheese production, involving frustrating and expensive re-planning and re-equipping of dairy factories.

Other new demands emerged and were met. Production of dehydrated meat was a special war industry to meet a United Kingdom demand which lasted from 1942 to 1944. Medicinal plants were grown to meet wartime shortages and, from the beginning of 1943, a very considerable expansion in vegetable growing was necessary to meet requirements of United States forces in the Pacific. Supporting industries were established to dehydrate or quick-freeze vegetables.

Superimposed on all this were anxieties about shipping for perishable foodstuffs and the desirability of extra cool storage, for butter at least, to provide against stoppages or irregularities.

2 Fresh pork from May 1943, butter from October 1943, other meat from March 1944.

Demands on Other Industries

Even before the war, United Kingdom manufacturers had been unable to meet all New Zealand demands for war equipment. Australian industries could not do very much towards filling the gap, and purchases from the United States and Canada were, in the early years, restricted by shortage of hard currencies. It became increasingly necessary for New Zealand industries to turn to the manufacture of munitions, if her armed forces were to be properly equipped. By normal standards, most munitions production in New Zealand was probably uneconomic and, in practice, it was spread through hundreds of small units throughout the country. Much of the equipment required had to be adapted or improvised; and staff had to be trained to use new types of machinery. This was a diversion of manufacturing effort to meet a war need. In spite of the difficulty in importing proper equipment, a high degree of precision in manufacture was attained. The value of war equipment and munitions produced in New Zealand during the war has been estimated at £42 million, equivalent to about a quarter of a full year's output from all manufacturing industries.1

To meet war needs, a considerable proportion of the resources in the building and construction industry had to be diverted from dwelling construction and industrial buildings to the construction of military camps, airports and other defence requirements. This work was facilitated by the fact that there had been considerable page 80 imports of heavy earthmoving equipment for public works purposes in the years immediately preceding the outbreak of war. Defence construction work during the war totalled £47 million in value. While it was being done, a forbidding total of deferred dwelling construction and other capital work accumulated.

Industrial effort in New Zealand was also diverted to step up shipbuilding. More than 500 small ships were built, including minesweepers, submarine chasers, tugs and barges. Ship repair work was important throughout the war, but became increasingly so as the centre of war shifted to the Pacific.

Coal mining, which had had a slack period prior to the war, was called on to increase production as the Australian imports of coal which had been available before the war became difficult to obtain.

New Zealand depended largely on her own resources to clothe her armed forces and, increasingly, the efforts of clothing factories, woollen mills, and footwear factories were diverted from civilian production for this purpose. Employment of women in these industries was considerably expanded, but demand increased faster. In May 1942, clothing joined other commodities which were rationed to the New Zealand consumer.

The general picture is of a very considerable diversion of industrial effort from peacetime supplies to war requirements, frequently involving considerable structural change in New Zealand industry, with new equipment and re-training of personnel to meet new demands. Not only were new types of munitions made, but many essential civilian commodities had to be made in place of supplies which could no longer be imported. This work, in many cases, had to be done with substitute materials and improvised equipment. New Zealand's productive capacity was put to the test as never before.

1 Based on average output of manufacturing industries for the war years.

Economic Impacts of War

The main economic impacts of the war on New Zealand were the call for manpower for the forces, the heavy financial cost of war, the demands on overseas funds, the need for extra food production and the realignment of industries to provide military construction and equipment instead of peacetime requirements. These demands on New Zealand were all on a large scale. She escaped the serious physical destruction incurred by those countries which actually became battlefields but the impact on her economy in other ways was very considerable. A major purpose of the chapters which follow is to show how the New Zealand economy was reorganised to meet these demands and how they were in fact met.